Oisin Challoner | October 6th, 2016

International Commercial Arbitration | Uppsala

University

SO FAR THE CANDLE

THROWS ITS BEAMS:

The Case for Arbitrating Expertly in Price Review

Disputes

Contents
Introduction...........................................................................................2
The Complexity and Nature of Price Review Disputes..........................3
Overview of Price Review Clauses..................................................3
Trolling the Depths: The Framework.................................................4
Procedure, Party Autonomy and Policy.................................................6
I. The Weight of Party Autonomy...................................................6
II.

The Counter-Weight of Arbitral Efficiency..............................7

III.

The Market Nature of Arbitral Services.................................8

Expert Arbitration: The Comfort Despised............................................9

Conclusion...........................................................................................11

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Introduction

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All strange and terrible events are welcome,

But comforts we despise. 1

Arbitration is a dispute resolution mechanism which, from its

inception, has within its purview a basic, innovative brand of
economic efficiency which is unknown to the judicial system to which

1 Shakespeare, W. & Neill, M., 2008. The Tragedy of Anthony and Cleopatra. Print ed.
Oxford: Oxford University Press.

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it complements and with which it co-exists. Those involved in this

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history- the denizens of ancient Syria, Egypt, Greece and Israel2would scarcely believe the reliability and co-operation on such a large
scale provided by the New York Convention3, nor the interlocking
systems of infrastructural services offered by Institutions such as the
SCC, ICC and LCIA.

2 Barrett, J. T. & Barrett, J. P., 2009. A History of Alternative Dispute Resolution: The Story of
a Political, Cultural and Social Movement. [Online] Available at:
https://www.adr.gov/events/2009/may7-2009-materials-history.pdf
[Accessed 30 September 2016].

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A common and relatively unique application of arbitral services in the

past has been the resolution of disputes arising under price review
clauses pertaining to the sale of resources over a long period of time.
Natural gas consumption has risen globally over the last 35 years4,
and the results of multiple LNG (Liquefied Natural Gas) price review
arbitrations have demonstrated the high stakes involved in such

3
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) New
York.

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transactions5. Although the demand seemingly has leveled out6, the

implications of the plethora of contracts for gas and the future
uncertainty of the market for energy sources means that such price
review arbitrations will continue to proliferate. The purchase and
operation costs of the equipment necessary for the liquefaction and
transport of the resource can easily number in the multi-billions,

4
The Oxford Institute for Energy Studies, 2014. The Outlook for Natural Gas Demand in
Europe. [Online]
Available at: https://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/06/NG-87.pdf
[Accessed 19 October 2016].

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rendering the need for long term contractual commitment in order to

secure capital investment7.
In this essay, I will seek to outline some relevant considerations
involved in policing price review disputes on an international scale. I
will then describe the relevant legal obstacles facing an arbitrator
tasked with such a dispute, also discussing why I believe these

Reuters, 2012. UPDATE 2-Edison's 450 mln euro discount on Qatari LNG holds hope for
Europe. [Online]
Available at: http://www.reuters.com/article/edison-rasgas-idUSL5E8KBA3320120911
[Accessed 7 October 2016] & Reuters, 2016. Eni says Dutch unit stake to be seized after lost
arbitration against GasTerra. [Online] Available at: http://uk.reuters.com/article/uk-enigasterra-arbitration-idUKKCN1002H3
[Accessed 7 October 2016].

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obstacles can often act to the disadvantage of both parties as well as

the arbitrator themselves. Lastly, I will mention my view on the future
of this arbitral sector as a whole, and make some recommendations as
to how a timely change of paradigm could improve the general
experience; thus (analogically) answering the question posed: what
strange and terrible do parties sometimes welcome, and what
comforts do they despise?
6

Jones, D., Dufour, M. & Gaventa, J., 2015. Europe's Declining Gas Demand: Trends and Facts
on European Gas Consumption. [Online]
Available at:
https://www.e3g.org/docs/E3G_Trends_EU_Gas_Demand_June2015_Final_110615.pdf
[Accessed 17 October 2016].

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European Commission, 2007. DG Competition Report on Energy Sector Inquiry. [Online]

Available at:
http://ec.europa.eu/competition/sectors/energy/2005_inquiry/full_report_part1.pdf
[Accessed 17 October 2016]

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The Complexity and Nature of Price Review

Disputes
I do not much dislike the matter, but
The manner of his speech. 8

Supra Shakespeare W.

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Overview of Price Review Clauses

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Contracts for the continuing sale of gas9 over a period of time are a
specialized form of commerce, the multiple instances of which share
certain identifiable characteristics in common. Their major governing
issues are the global significance and volatility of the resource being

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exchanged10 and the length of time over which the parties have
agreed to conduct this exchange11. The task of assigning an objective
value to be used throughout the lifetime of a 20-year contract is
daunting to even the most rugged and experienced of transaction
lawyers12. As uncertainty can be the hand that gives as well as the
hand that takes to either party in the transaction, it is in the parties
shared interest to construct a price review clause within their
9

I have decided to use gas as a placeholder resource name for the purposes of this essay
due to the abundance of writings attached to it and its proliferation in the world of price
review disputes. It will be assumed that, in most cases, mentions of gas could be substituted
for whatever resource is in question which fits the correct definition.

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contract which will attempt to mold itself upon future market

developments which hold sway on the partys relationship.
Price review clauses find their spiritual origin in the North Sea gas
industry, where upstream suppliers would lock-in long term contracts
for supply in order to secure capital finance from banks13. Having
satisfied the requirements of the banks in this regard, the suppliers

10

The Economist, 2011. The future of natural gas. [Online]

Available at: http://www.economist.com/node/21525381
[Accessed 13 October 2016].

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would then need to satisfy the buyers that their investment was a
sound one, and would thus link the monthly gas prices to the prices of
competing sources of energy in the market in the form of an index14.
This provision of what was common and normal required also a
provision to the exception: what would happen if unexpected changes
in the market took place?

11

Mildon, D., 2012. Gas Pricing Disputes. [Online]

Available at: http://www.eisourcebook.org/cms/Gas%20Pricing%20Disputes.pdf
[Accessed 6 October 2016].

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Trolling the Depths: The Framework

This triumvirate of considerations gave birth to the Troll clause, so
named for the transactions involving the Norwegian Troll gas field15,
which provides a textual framework for the workings of a price
review16:

12

Ibid.

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i.

The Trigger

An event which permits the clause to be invoked, at the time of the

trigger or at a pre-set anniversary date. This could be as simple as
a 4-year period17 or as complex as a multi-stage process requiring
conditions precedent and evaluations of the economic
circumstances of both the transaction itself and the wider national

13

Harper, T. K., 2014. The clients perspective. In: 1st, ed. Gas Price Arbitrations. London:
Globe Business Publishing, pp. 103-116.

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market18. Depending on the mechanism agreed upon by the parties,

the task of the arbitrator in solidifying a price review date- or
whether the trigger has taken place at all- can involve complex
legal and mathematical appraisals.

14

Melling, A. J., 2010. Natural Gas Pricing and its Future: Europe as the Battleground,
Washington, D.C.: Carnegie Endowment for International Peace, pg. 12-19.

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ii.

The Procedure
Prescribed procedures for negotiation which may prevent the need
to arbitrate, thus saving costs and time. If such procedures fail, the
parties will then resort to a binding dispute resolution mechanism
such as arbitration.

15

Brauteset, A., Hoiby, E., Pedersen, R. & Michelet, C., 1998. Norsk Gassavstetning , Rettslige
Hovedelementer.

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iii.

Criteria for Formula Revision

This provides for any specific circumstances the parties could have
defined at the contracts agreement, thus allowing the impact of a
minor event to be minor and a major event to be major (as opposed
to scrapping the entire paradigm due to a relatively insignificant
change). Here the arbitral mandate is defined, on foot of which the

16

Supra Mildon, D pg 3.

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tribunal must decide whether they are to merely amend the

existing formula to affect the changes proven or to begin a blank
paper process, considering if any guidance whatsoever has been
provided by the parties to this end19.

17

Office of Fossil Energy, 1988. Distrigas Corporation (ERA Docket No. 88-37-LNG, ERA
Docket No. 88-05-LNG). [Online] Available at:
http://www.fossil.energy.gov/programs/gasregulation/authorizations/orders/70132.pdf
[Accessed 17 October 2016].

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iv.

Provision for Further Adjustment once the Price is determined.

Having set the price, events which took place after the freezing of
relevant facts to the case are taken into account to, for example,
balance payments between the parties.

The details and ramifications of each of these elements leads to a

process as wide as it is deep, and the challenges facing an arbitrator

18

Petersen, C., 2009. Gas Natural Aprovisionamientos, SDG, S.A. v. Atlantic LNG Company of

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in search of a satisfactory solution are manifest. The net result of such

complexity is that the arbitrator must pay homage to several
mistresses: those of party autonomy & interests; the efficiency of the
arbitration itself; and the market for arbitral services.

Trinidad and Tobago and Price Reopener Clauses in an Uncertain Environment for LNG
Pricing. [Online]
Available at: https://www.paulhastings.com/docs/default-source/PDFs/1226.pdf
[Accessed 17 October 2016].

19

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Procedure, Party Autonomy and Policy

Do I believe in arbitration? I do. But not in arbitration between the
lion and the lamb, in which the lamb is in the morning found inside
the lion. - Samuel Gompers (1850-1924)20
I.

The Weight of Party Autonomy

The principle of Party Autonomy allows the parties to an arbitration

clause to have near-complete control over the form and rules of the
process which will take place, be it a concrete system of national law
or the whimsy of the arbitrator acting ex aequo et bono21. However, at
the time when most contracts are signed, the arbitration clause (or
any clause which concerns dispute resolution) is very often an afterthought22. The parties may be so (justifiably) concerned with the
particulars of the contracts substance that the idea of a confrontation
arising in the future is far from their mind; therefore, it is often

Holland, B., 2012. Natural Gas Price Reviews: Past, Present and Future. Journal of energy &
natural resources law, 30(1), pp. 29-44, pg 39.

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encouraged that parties and their counsels will undertake to craft

their arbitration clauses with an abundance of care and foresight in
order to ensure that irregularities and frustrations are kept to a
minimum- an augmented, definite contract signature cost of a few
hours can be a sound investment when compared to the hundreds of

20

President of the American Federation of Labour (1888-1924).

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billable hours which ensue when disagreements then arise around the
ambiguities23.
This conventional advice is called into question however when the
topic of discussion concerns price reopeners. A new layer is
introduced: that of the market at large, and the competing energy

21

Hobr, K., 2011. International Commercial Arbitration in Sweden. 1st ed. Oxford: Oxford
University Press, pgs 41-43.

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sources, which the parties can have trouble predicting24. Whereas

before there was only the volatility of the parties and their newlyemerging interests, now the transaction operates in the shadow of the
market, whose wills and wains may warp even the most wellintentioned party to a ghastly ghoul, intent on self-preservation at all
costs.

22

Park, W. W., 2006. Arbitration of International Business Disputes. 1st ed. Oxford: Oxford
University Press, pg 472.

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Indeed, there are several ways already existence that the selfsufficiency of an arbitral arrangement is limited. Mandatory rules,
third-party interests, and the unforeseen role of applicable law can all
act to interrupt the closed circuit the parties have created in their
clause25. In cases such as these, the arbitrator will need to have
recourse to some form of higher, uniform principles which can be
employed to solve the dispute. I submit that, in the case of price
23

Ibid 473.

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review, the necessary deciding factor which arbitrators must apply is

that of the commercial concerns I have described in the previous
sections. This is with a view to best resolve both the central issue of
the arbitration and, as I will discuss in the next section, conduct the
arbitral proceedings in as efficient a manner as possible.

24

Khanna, D. & Hopkinson, I., 2015. Oil Price Volatility: The Effect on Gas Pricing Disputes.
[Online]
Available at: http://kluwerarbitrationblog.com/2015/08/10/oil-price-volatility-the-effect-on-gaspricing-disputes/
[Accessed 6 October 2016].

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II.

The Counter-Weight of Arbitral Efficiency

Arbitrators, much like any other profession, are so named for the
service they provide. A central aspect of their role in arbitrations
flows from their experience, professionalism and innovation: their

25

Cordero-Moss, G., 2014. Limits to Party Autonomy in International Commercial Arbitration.

Oslo Law Review, 1(1), pp. 47-66.

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case management26. Case Management refers to a wide range of

decisions the arbitrator may take in order to grease the wheels of the
arbitral train- in essence, the arbitrators goal is to clarify the
pleadings of the parties to the extent that an informed decision can be
made, without the risk of the award being ultra petita or infra petita.
This is to satiate parties desire for low-cost, expeditious proceedings;

26

Hobr, K., 2011. International Commercial Arbitration in Sweden. 1st ed. Oxford: Oxford
University Press, pg 244-245.

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the ICC Rules in 2012 have introduced new rules in this regard,
ranging from Statements of Availability to avoid delays due to the
absence of an arbitrator under high case-load, to the duty on both the
parties and the arbitrators to conduct the proceedings in an
expeditious and cost-effective manner27.

27

Gillion, F., n.d. Imapact of the new ICC Rules (2012) on the management of construction
arbitration cases. [Online]
Available at: http://www.fenwickelliott.com/files/fred_gillion_-_eic_june_article.pdf
[Accessed 20 October 2016].

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One example of this type of case management occurs when several

related claims are consolidated into one comprehensive proceeding.
The advantages of this approach are self-evident, not only in terms of
the costs associated with billable hours, venues and travel, but also in
terms of the time saved by both arbitral tribunal and parties. There is,
as always, a price to be paid, and a respondent put in such a situation
may justifiably be concerned by the encroachment upon their
autonomy which could result in biases being imposed on the tribunal
as multiple arbitrators (who otherwise would have sat on separate

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proceedings) hear all the cases in near-unison28. Arbitral wards have

in fact been set aside for these reasons29, so the risks involved in
active case management rightfully weigh heavily in the mind of an
arbitrator.
Once again, this dichotomy of the norm remains relevant for most
arbitrations. As described above, however, the inner workings of a
28

Fortese, F. & Hemmi, L., 2015. Procedural Fairness and Efficiency in International
Arbitration. Groningen Journal of International Law , 3(1), pp. 110-124.

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price review arbitration pose the risk that rigid conformity to these
guidelines, and the lessons learned from the body of arbitration
writings, can lead to inefficiency which would otherwise be avoidable.
There are commercial realities at stake in the proceedings, the likes
of which may easily be subverted by the fears of a nervous party
simply desiring to protect their interests. The arbitrator, if they desire

29

US Supreme Court Stolt-Nielsen v. Animalfeeds International Corp. 27 April (2010) 559 US

662.

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to find a solution which could be consider correct by some metric,

must satisfy these financial interests both, but may be hindered in
seeing the technical forest for the legal trees30.
III.

The Market Nature of Arbitral Services

30

Levy, M. & Gupta, R., 2016. Gas Price Review Arbitrations: Certain Distinctive
Characteristics. [Online]
Available at: http://globalarbitrationreview.com/chapter/1036074/gas-price-reviewarbitrations-certain-distinctive-characteristics
[Accessed 13 October 2016].

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As distinct from the arbitration of a garden variety legal issue- arising

from an allegation that one party has breached the contract- the
resolution of the parties interests in a manner which is both a
product of their intention and compatible with the market at large
appears difficult to achieve. Moreover, the arbitrator must deal with
the reality that the parties business relationship is set to continue
past the four walls of the arbitration31. The service required walks the
31

Ibid.

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tightrope between Mediation and Arbitration: providing the nearconciliatory relations of the former with the finality of the latter.
Moreover, in the heel of the hunt, one of the largest factors separating
arbitration from litigation is the market nature of the service being
provided. Arbitrators operate on a system of social capital; with each
newly appointed arbitrator, there is a test of tacit referral and
preferential treatment32. This is not extraordinary, but rather means
32

Puig, S., 2014. Social Capital in the Arbitration Market. Eur J Int Law, 25(2), pp. 387-424.

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that the market can be structured around a certain type of incentive

in one direction or the other- in the same way that a bride wishes to
entrust the hem of her wedding dress to a well-respected tailor,
parties wish to appoint and be involved with arbitrators who will, on
aggregate, resolve their disputes amicably and satisfactorily. For each
case that is resolved in an arbitrary, confrontational manner without
recourse to the commercial implications of the parties relationship,
there will inevitably be at least one party who will experience
discontent. Negative press is thus sure to follow.
This illustrates the unique paradigm presented by price review
arbitrations. Moreover, it entails a necessity that the arbitrator
possess a certain amount of knowledge and expertise specific to the

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practices of gas pricing33. Price reopener arbitrations do not

emphasise the assignment of fault nor the application of complex
factual evidence as to the law surrounding the breach as a
commercial arbitration would34.
The implication of this reasoning is as follows: arbitration has a choice
in regards this type of conflict and its resolution, that of the narrow

33

Supra Levy.

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and that of the broad. If the terms of the arbitration are to be

interpreted narrowly, the arbitrator will slot into their old, familiar,
limited role, resulting in extended arbitrations and impotent awards,
many of which the parties have been forced to revise themselves in
the arbitrations aftermath35. The alternative is to broaden the service
to be offered: acknowledge the particular nature of the problem to be
solved, and offer a bespoke process of dispute resolution which, in
34

Ibid.

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removing the narrow blinders from the arbitral workhorses vision,

produces a more attractive solution.

35

Stanic, A. & Weale, G., 2007. Changes in the European gas market and price review
arbitrations. Journal of energy & natural resources law, 25(3), pp. 324-344, 342.

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Expert Arbitration: The Comfort Despised

I have not kept the square, but that to come
Shall all be done by the rule.36

36

Supra Shakespeare W.

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The players described above operate in an environment of information

asymmetry. Both parties have often been socialized by a legal climate
of litigation and polarizing arbitration such that, in their efforts to
protect their interests by concentrating on those aims which most
separate them, they neglect to address those which could most unite
them. For example, in many cases, an average of 90 % of the costs
claimed in a given case were the expenses of parties, their lawyers,
staff, witnesses and experts. The expenses of the corresponding
arbitral institute were between 2% and 5%, and the expenses of the

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arbitrators in the range of 4% to 7%37. In this sense, there is a direct

relationship between the contrivance imposed upon the dispute
created by the parties and the exponential rise in costs they both
undertake to meet the heightened intricacy. The manner in which the
costs of the institute and the tribunal are determined however is an
infrastructural issue outside of the control of the parties once they opt
to have that institution conduct their arbitration; the stark difference
37

Bcksteigel, K.-H., 2012. Party Autonomy and Case Management Experiences and
Suggestions of an Arbitrator. [Online]
Available at: http://www.arbitrationicca.org/media/1/13644850393080/bckstiegel_party_autonomy.pdf
[Accessed 21 October 2016].

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between the two heads of cost demonstrates the area through which
the parties could potentially lessen their financial burden.
It seems to me that their efforts would be better spent funneling the
control over the disputes framework and the questions to be tried
from their own legal teams into that of the arbitrator (more resolutory
bang for their percentual buck one could say). In his book on the
subject, William W. Park mentions that fewer anti-abuse mechanisms

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are more effective than an experienced and capable arbitral

tribunal38. Parties would hopefully be encouraged, when appointing
their arbitrator, to ask Is this person expert and capable enough to
handle the issues involved in our case?, rather than conducting their
selection with a view to maximizing factors such as sympathy to their
side or other tactical considerations39.

38

Supra Park, pg. 454.

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The task of the arbitrator would then be to investigate and have

submitted to them the relevant facts required to make the decision,
and not to passively police and thus enable the slow, painful and futile
chipping-away of party relations to the detriment mostly of the parties
themselves. Therefore, while it is true that the parties were likely
aware of the clauses ramifications, it is fair also to state that they
were also aware of the uncertainty it could produce in their future
39

Ibid.

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relationship. If an older contract provides for index as to the price of

oil when there was no relevant gas market to refer to, it would not be
a stretch of interpretation to infer that this form was a means to an
end; when compared to a hypothetical contract 10 years later, such a
clause appears strongly to be a more deliberate choice on the part of
the parties, with a view to speculating on the future oil/gas
relationship40. An arbitrator with their hands tied may not give breath

40

Blackett, R., 2014. Pricing Arbitrations: Its a Gas, Gas, Gas. [Online]
Available at: https://www.andrewskurth.com/insights-1085.html
[Accessed 7 October 2016].

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to the intention that can be readily perceived. They may not use their
economic and business experience to make the judgment that, had the
parties been asked by an Officious Bystander What if there were a
market price for gas available? Would you use that instead?, they
would have replied Yes of course, stop bothering us you officious
man.41.

41

Ibid.

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Conclusion
So shines a good deed in a weary world.42
In a 2013 paper, Dr. Joerg Risse outlined a Magic Triangle of
arbitral aims: its corners include time efficiency, cost savings and
quality of award43. Per the triangle, only two of these options can
feasibly be achieved, to the neglect of the third. In keeping with the
theme of this paper, however, I would suggest that price review
42

Shakespeare, W., 1599. The Merchant of Venice. [Online]

Available at: http://shakespeare.mit.edu/merchant/full.html
[Accessed 26 October 2016].

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disputes once again are in a unique position as to transcend this

limitation. Few disputes share the set of features that I have outlined
above; few disputes devote themselves so wholly to an issue of pure
economic profit and loss as is most often the major concern here.
This, to me, means that price review disputes are poised for a new
arbitration, one unafraid to offer bespoke services for specific

43

Risse, J., 2013. Ten Drastic Proposals for Saving Time and Costs in Arbitral Proceedings.
Arbitration International, 29(3), pp. 453-466.

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problems. One where efficiency, low-costs and quality awards are the
primary aims non-beholden to arbitrary issues of party autonomy and
legal procedure.
In this sense however, the opportunity to avail of the comfort so
described rests firmly with the parties themselves. It is for them to
realise that, assuming the correct incentives for skilled arbitrators
exist in the market, the risk of losing tactical ground are far
outweighed by the benefits both to them and the wider economic
market when such arbitrators are allowed to do their job to the best of

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their ability. It has been said44 that arbitration is currently in its

autumn, a time of vibrant maturity as arbitration finds its footing in
the legal world and begins to settle upon its substantial body of
writings and academia. The recognition and amelioration of price
review disputes in this sense would be but one more step on this
stairway, one where an arbitral candle mayshine radiance upon a
weary world.

44

Park, W. W., 2011. Arbitration in Autumn. Journal of International Dispute Settlement, 2(2).

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