High Court rules "re-negotiation" clause in commercial contract is not void for uncertainty

High Court rules "re-negotiation" clause in commercial contract is not void for uncertainty

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In the recent judgement of Associated British Ports v Tata Steel UK Ltd [2017] EWHC 694 (Ch), the High Court ruled that a clause in a 25 year port licence agreement entered into between Associated British Ports (“ABP”) and Tata Steel (“Tata”) requiring terms to be re-negotiated in certain circumstances was not void for uncertainty.

Under English law, when assessing commercial contracts, a contract may be found to be void and unenforceable if its terms lack certainty. However courts generally strive to give the contract meaning and effect and will, if necessary, imply reasonable terms so as to avoid a ruling of uncertainty.

Clause 22 of the port licence agreement provided that in the event of any major physical or financial change in circumstances at any time after 15 September 2007 (half way through the 25 year contract term), either party could serve notice on the other requiring the terms of the licence to be re-negotiated. If the parties could not agree amended terms within 6 months of such notice being served, the clause provided that the matter was to be referred to an arbitrator whose decision was to be binding.

In February 2016, Tata sought to rely on clause 22 arguing that a major financial change in circumstances had affected the operation of its steel works at the harbour owned by ABP and that the terms of the licence must be re-negotiated. Tata sought several amendments to the licence terms including a substantial reduction in the fee payable for its use of the harbour. 

ABP argued that clause 22 was void for uncertainty due to the triggering event (“any major physical or financial change in circumstances”) being too uncertain to create a binding obligation to refer a dispute to arbitration. ABP also contended that there were no or insufficient objective criteria to guide the arbitrator in deciding how to amend the licence terms.

The Court held that the arbitration clause was valid and effective. When coming to this decision, the judge noted that the contract fell into the category of cases which concerned a commercial contract that had been substantially performed and therefore the court should be particularly reluctant to find the clause void for uncertainty. The judge also noted that it was not difficult to determine the commercial sense behind clause 22. Clearly, the parties did not enter the 25 year contract intending its terms to be unchallenged for the entire term and the halfway point was intended to enable the first major reassessment. The judge commented that provided it was possible to determine some changes which would fall within the scope of “major physical or financial change in circumstances” and some which clearly fell outside it, the phrase was sufficiently certain to be enforceable even though it might be difficult in the abstract to draw the precise divide between changes falling on either side of the line. It was therefore determined that the trigger phrase in clause 22 was sufficiently certain to create a binding obligation on the parties to refer a dispute to arbitration.

With regards to ABP’s argument that clause 22 lacked objective criteria to guide the arbitrator on how to amend the licence terms, it was held that clause 22 was not open-ended and the arbitrator was not faced with setting new terms in a vacuum. The arbitrator could imply reasonableness into the clause, which would be determined by all the circumstances including the existing terms of the agreement, the nature of the physical or financial change that had triggered the arbitration and submissions from the parties.

This decision highlights the approach of the courts to give effect to the intention of the parties in commercial contracts wherever possible and also the difficulty in persuading a court that a commercial contract is void for uncertainty. This seems to be particularly relevant in cases where the contract has been substantially or partially performed.

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