At the contract formation stage, leaving key issues for future negotiation may mean you only have an agreement to agree rather than an enforceable commitment. But what is the position if you include in the agreement an express duty to renegotiate certain terms during the life of the contract? This can often be prudent with a long-term contract, where circumstances may change during the term of the agreement in a way the parties cannot foresee. Or, when you enter the contract, you may be aware of a future event – such as Brexit or the planned withdrawal of LIBOR – that may call for renegotiation of affected clauses once the alternatives become clear. How can you draft an obligation to renegotiate so it stands the best chance of being enforceable once you need to rely on it? A recent case, Associated British Ports v. Tata Steel UK Limited [2017] EWHC 694 (Ch), provides useful guidance.

The facts

In 1995, the parties entered a 25-year licence for Tata to use ABP's deepwater harbour facilities at Port Talbot to receive goods needed at Tata's two nearby steelworks. The licence required ABP to maintain the port facilities and to dredge the berths used by Tata to accommodate a bulk carrier vessel. The licence fee due from Tata comprised a fixed sum each year and other variable components. These were adjusted by reference to matters including annual tonnages (subject to a guaranteed minimum) and specified price indices. Tata also had to pay a proportion of repair and maintenance costs of the facilities used by it.

The renegotiation clause stated as follows:

"…in the event of any major physical or financial change in circumstances affecting the operation of [Tata's steelworks] or ABP's operation of [the port] on or at any time after 15 September 2007, either party may serve notice on the other requiring the terms of this Licence to be re-negotiated…the parties shall immediately seek to agree amended terms reflecting such change in circumstances and if agreement is not reached within a period of 6 months…the matter shall be referred to an Arbitrator…"

Tata had the right, also after 15 September 2007, to give 12 months' written notice to terminate the licence if it closed both of its local steelworks. In 2015, Tata mothballed one of its sites but its other works remained operational. In February 2016, Tata gave notice under the renegotiation clause seeking amended licence terms, including a 50% cut in the fixed fees. Tata argued there was a "major physical or financial change in circumstances" due to various market challenges facing the UK steel industry. These included the vast increase in cheap Chinese imports into Europe, resulting in a sharp fall in prices for domestic steel, the strong pound which had made UK exports uncompetitive, and higher import tariffs imposed by the US.

ABS argued that the renegotiation clause was void for uncertainty.

When is a renegotiation clause enforceable – the principles

The court confirmed there is a distinction between two types of case. The first is where the agreement to agree results in a dispute about whether the parties have reached a binding contract at all. The second is where, as here, the obligation to negotiate is part of an enforceable contract which the parties have already partly performed. In the former case, there is often a question about whether the parties had the necessary intention to create legal relations. (Note though that the parties can have that intention yet the agreement can still fail if the terms they need to agree and the basis for that agreement are too vague. Barbudev v. Eurocom Cable Management Bulgaria EOOD [2012] EWCA Civ 548 is a recent example.) Where, however, there is a valid contract and the parties have partly performed it, the courts should be reluctant to strike down a clause requiring them to seek to agree certain points. The aim should be to preserve rather than destroy the parties' bargain.

But even in such a case the clause can still fail for uncertainty. The question is whether the court can give the provision practical content. This is usually possible if there is a mere difficulty of interpretation but not if the clause is ambiguous in its meaning and intended effect. There are two potential aspects to this. First, is the clause clear on when the duty to negotiate arises? And second, does the clause contain sufficient objective criteria to determine what the result of the renegotiation ought to be?

Applying the principles to the Tata case

At first glance, the renegotiation clause in the licence seems problematic on both of these issues. The trigger point is potentially very broad. As ABP argued, how could an arbitrator identify when there has been a "major physical or financial change in circumstances" for the purposes of the clause? Relevant market conditions would – and did – fluctuate hugely over quite short periods (indeed, the strength of sterling in 2015 now seems a distant memory).

Despite this, the court said the trigger was not too vague. It was possible to identify changes that would definitely fall within the scope of the trigger. Others would clearly fall outside it. That made the trigger wording certain enough, even though "it may be difficult in the abstract to draw the precise divide between changes falling on either side of the line". The trigger was not completely open-ended: the party invoking the clause would have to show that the relevant change affected the operation of the steelworks or the port. The arbitrator might reasonably come to the view, for example, that the parties did not intend temporary changes in market conditions to fall within the scope of the clause. Where the licence made express provision for the impact of specified events it was unlikely the parties intended these also to be a trigger for the renegotiation clause.

The basis on which the parties should agree amended terms or the arbitrator should determine them also seems vague. ABP argued there was a complete lack of guidance in terms of objective criteria both within and outside the licence. There was a potentially infinite range of possible outcomes. But again the court upheld the clause as enforceable. There are many cases where the court has implied a provision that the negotiation must result in a "reasonable" term, for example as to price or quality. Sometimes, expert evidence may help to establish what is reasonable in the circumstances. The judge summed up this point by saying:

"I do not accept that the clause is as open-ended as ABP assert. The Arbitrator is not faced with setting new terms in a vacuum. First, he or she will have before them the existing terms of the Licence…[these] show what the parties considered to be a fair and reasonable bargain in the circumstances that prevailed when the Licence was entered into. That provides a useful starting point."

The arbitrator would then have to consider the actual physical or financial change that had taken place and how it affected the parties' operations to fashion a reasonable variation of the licence terms.

Practical implications

The Tata case is a welcome reminder that courts will usually try to uphold even quite broadly and vaguely drawn renegotiation clauses in contracts that are otherwise binding, particularly if the parties have already significantly performed their respective obligations. But there are ways to increase the chances of a court enforcing such a clause:

  • Make the trigger point for the renegotiation as clear as possible. With the withdrawal of LIBOR, for example, this should be reasonably easy. In the case of Brexit and given the current uncertainty about whether there will be transitional arrangements and of what kind, it may be more complex.
  • Specify objective criteria which the parties must take into account (or ignore) when agreeing the amended terms. Including a requirement of reasonableness can help (though a court may well imply this anyway). Again in a LIBOR context, it may be appropriate to make it clear that the result of the renegotiation should put the parties back in the same position vis-à-vis the relevant interest payment obligation as before the variation and that any replacement benchmark used should be publicly available. In other contexts, the relevant change in circumstances may mean it is difficult or impossible to restore the status quo, so spell out as far as possible how the outcome should be arrived at.
  • Specify a time limit to the negotiations and consider how to deal with a failure to agree amended terms. Generally, a dissatisfied party can ask the court to enforce the clause. But specifically providing for a third party to decide the result of the renegotiation can help show that the parties did not intend each other to be free to agree or disagree the amended terms based simply on their own commercial interests. Where appropriate, a right to refer the matter to arbitration (as in Tata) or expert determination may therefore help.