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The Guide to Energy Arbitrations - Second Edition

Issue Estoppel in Gas Price Reviews

In several recent price reviews we have come into far too close contact with the fraught effects of issue estoppel on long-term contracts. Price review clauses in long-term[1] gas and liquefied natural gas (LNG) sale and purchase contracts in Europe (and elsewhere) are common.[2] A tribunal’s decision on the interpretation of the price review clause in the first price review will resonate throughout the life of the contract. Yet, the arbitrators will decide that price review against the background of the relevant facts and market conditions at the time. The inexperienced may also have little knowledge of how those facts may change during the remaining term of the contract. In this article, we explore the challenges this poses not only for international arbitrators but also for parties and their legal advisers when pursuing or defending price reviews. To do so, we will explore the nature and extent of issue estoppel and the practical impact it may have on later price review arbitrations.

Introduction

English law, in common with other legal systems, ‘requires that limits must be placed on the rights of citizens to . . . reopen disputes’.[3] Therefore, ‘if an issue has been distinctly raised and decided in an action . . . it is unjust and unreasonable to permit the same issue to be relitigated afresh between the same parties or persons claiming under them.’[4] So, ‘the law insists on finality’ and ‘certainty of justice prevails over the possibility of truth.’ [5] These are the ideas that lie at the heart of the principles of res judicata and issue estoppel.

In that context, an agreement that expressly anticipates that over its term the parties may repeatedly ask the same issue[6] to be decided may appear rather curious. Yet, long-term contracts commonly include price review clauses that do precisely that at a number of set times during the life of the contract. They invite arbitral tribunals (rather than courts) to decide whether (and how) the contract price should change. Other long-term contracts in the international energy business, such as joint operating agreements or unitisation agreements, often ask tribunals (or experts) to do something similar, for example redeterminations of the same issue several times during the contract.

All of these contracts commonly use international arbitration (or expert determination), rather than court, to decide these issues. English law has accepted for some time that issue estoppel applies equally to an arbitral award[7] (or expert determination[8]) as it does to a court judgment. However, it is notable the leading English law textbook on res judicata and issue estoppel[9] devotes no more than two sentences to applying issue estoppel in arbitration.[10]

This article explores the interaction between price reviews under long-term contracts and issue estoppel. As a starting point it is necessary, therefore, briefly to explain and explore how price review clauses in long-term contracts commonly work and the doctrine of issue estoppel. The principles of issue estoppel outlined below are also, of course, of general application to an arbitral award involving any long-term contract in the international energy business.

Price review clauses in long-term gas contracts

Parties agreeing a price (and price formula) in a long-term contract will usually do so given their current market understanding and expectations about how that market may develop in the future. So, on the date it is agreed, the price is likely to reflect the current market value of gas (or LNG) with the agreed price formula anticipated to track market value over time. Nevertheless, over 20 years or more, markets change, and, inevitably, the relationship between the price produced by the agreed price formula and the current market value will vary. Prudent parties will build an anticipated degree of price variation into their initial valuation. However, no matter how prudent parties are, sometimes the underlying deal encapsulated in the price formula will break down. This is why parties commonly agree price review clauses.

There is no standard form of price review clause and this article will not consider in detail how they work.[11] However, commonly, they enable either party to trigger a price review every three to five years during the contract if certain conditions are satisfied, often linked to significant changes in the market between a fixed date and the review date. This usually involves a detailed economic analysis of market conditions and prices on or around those dates. If the trigger conditions are satisfied, the price review clause will provide objective criteria for assessing the revised contract price (and price formula) to apply from the review date. Applying those criteria will require complex economic and mathematical modelling and reliance on multiple competing sources of pricing information. This brief summary should provide a flavour of the challenges that parties, their legal advisers and international arbitrators face when dealing with a contentious (and high-value) price review arbitration.

It is notable, however, that at no stage does a price review arbitration involve any allegations of breach of contract by either party resulting in loss and, therefore, a cause of action in damages or some other claim. Rather, what the parties are asking the arbitral tribunal to do is to operate the price review clause, absent them having agreed a new price or price formula. Therefore, cause of action estoppel cannot arise (there being no cause of action), but there is the possibility of an issue estoppel on the decision made by the tribunal.

Having considered the terms of the price review clause and the evidence, the tribunal should issue an award that decides several issues. First, it will interpret the price review clause. Second, it will apply the facts to that interpretation, namely in deciding whether there should be a price review. Finally, if it decides the price should be reviewed, it will also set the new price, the new price formula and the back payment due.

Issue estoppel in price review arbitrations

Spencer Bower starts its exploration of issue estoppel by stating simply that ‘A decision will create an issue estoppel if it determined an issue in a cause of action as an essential step in its reasoning. Issue estoppel applies to fundamental issues determined in an earlier proceeding which formed the basis of the judgment.’[12] Therefore, an issue estoppel applies to ‘a state of fact or law which is necessarily decided by the prior judgment, decree or order’.[13]

Further, in the Good Challenger case,[14] Clarke LJ summarised the four conditions necessary to establish an issue estoppel under English law as:

(1) the judgment must be given by a foreign court of competent jurisdiction; (2) the judgment must be final and conclusive on the merits; (3) there must be identity of parties; and (4) there must be identity of subject matter, which means that the issue decided by the foreign court must be the same as that arising in the English proceedings . . . .[15]

We would expect these four conditions to apply equally to an arbitral award as to a court judgment, and there is no English law authority to suggest otherwise.

Applying this test to an arbitral award in a price review

It might seem indisputable that the arbitrators’ decision in the first price review under a long-term contract will create an issue estoppel on the meaning of the price review clause for any future reviews. That issue estoppel will also prevent the parties from raising in any future price review under the long-term contract new issues (or evidence) about that interpretation ‘which the parties, exercising reasonable diligence, might have brought forward’ in the first arbitration.[16]

One particular point of interpretation that often arises in price review arbitration is the meaning of the word ‘significant’. Commonly price review clauses require a change or a difference to be significant before allowing a price review to occur. It is strange that English law has failed to define that word beyond trite comments such as ‘not insignificant’.[17] This lack of legal guidance means that a tribunal may form a view on what significant means given the facts at the time. In doing so it might define significance for future price reviews under the same long-term contract.

Applying the facts to the price review clause and, therefore, deciding whether a price review should occur will raise more complex questions about the extent of any issue estoppel that may arise. That is because ‘only determinations that are necessary for the decision and fundamental to it’ will result in an issue estoppel; collateral findings will not.[18] There are few decisions that highlight the difference between fundamental and collateral findings. However, for example, it would appear a decision to grant probate over an estate to a person is unlikely to be conclusive as to whether that person and the deceased were joint tenants of the deceased’s property.[19] The decision to grant probate is fundamental; the question of the joint tenancy, collateral. So, distinguishing the necessary and fundamental from the unnecessary and not fundamental may be, to say the least, difficult. Is the finding of a particular fact ‘no more than part of the reasoning supporting the conclusion’[20] or is that fact itself the ‘immediate foundation’[21] of the decision?

The extent of any issue estoppel on whether the trigger conditions for a price review has been satisfied as at the review date will be important for future price reviews. For example, let’s assume a price review is triggered where ‘circumstances beyond the control of either party resulted in a significant change in the energy market of the Buyer compared to such energy market on [date]’.[22] If a tribunal decides a significant change in the energy market happened between the review date and the date stated in the clause, an issue estoppel should prevent either party from arguing the contrary in any future arbitration.[23]

However, is it fundamental to that decision that the tribunal has also decided the state of the energy market of the buyer at each relevant date? Arguably, it must be, because absent those findings of fact its decision that the relevant energy market has changed significantly could not stand.[24] Nevertheless, the contrary view says those findings of fact are merely collateral to the fundamental decision that the trigger conditions are satisfied, namely the relevant energy market has changed significantly. So, in a future price review, will a party be able to reopen the issue of the state of the relevant energy market as at the review date for the first price review? This is important: the state of the market then will be the starting point for assessing significant change in the next price review. In our view, the issue estoppel should properly extend to the state of the relevant energy market as at the review date for the first price review. That is because, absent certainty about that fact, it is difficult to conduct a proper assessment for a future price review. However, there is clearly room for argument. Further, it must be remembered that it is for the party asserting an issue estoppel to prove it arises[25] and there is English Court of Appeal authority urging that caution should be exercised in finding an issue estoppel arises.[26]

This point is not limited to price review clauses that examine the relevant energy market. A similar issue will arise in any price review clause that requires a comparison between two states of affairs. That could be comparing the market at two different times. Similarly, it could be comparing two prices at the same time (e.g., the contract price and the market price or average import price on the review date). Using ideas of ‘change’ or ‘difference’ is common in price review clauses for obvious reasons. To decide difference necessarily involves two factual assessments both of which may, strictly speaking, prevent a future redetermination of the same facts in a future arbitration.

Finally, the tribunal’s decisions on the revised price, the revised price formula and the back payment due result in a clear issue estoppel. If one party disagrees with the tribunal’s decision on these issues, its recourse is to appeal (if it can) or challenge the award. It is not to start separate proceedings disputing that the price or price formula should change or that it is not liable to make the back payment.

Practical issues with an arbitral tribunal deciding the first price review

So far we have considered the possible extent of any issue estoppel that may arise from an arbitral award on the first price review under a long-term contract. We have done so by looking at each part of the likely award, namely interpretation, application and the financial result. However, our experience of price review arbitrations suggests that, in reality, both the parties’ and the tribunal’s approach to arguing and deciding a price review is not that clean-cut.

Separating the meaning of the price review clause from its application to the relevant facts is often artificial in practice. The facts, opinions and data that economic experts present in evidence at price review arbitrations are, in our experience, usually the key determinants of the result of the price review. In particular, access to data and questions about their accuracy and reliability are often crucial issues. Long-term contracts (and especially their price formulae) are highly confidential. So, obtaining actual pricing information often proves impossible. Publicly available pricing information (such as filed accounts and customs data) can prove opaque and, therefore, open to argument and challenge. As a result, the economic evidence presented by both sides not only is complex but also often leads the experts to take diametrically opposed positions arising from differences of opinion about methodologies or the most relevant facts and data. Therefore, the real dispute between the parties sometimes boils down to a debate about which methodology or price data the price review clause directs the tribunal to use to decide various issues.

This reality can lead to the competing legal arguments about the interpretation of the price review clause becoming secondary to the complex economic evidence the tribunal has to assess. The result of this is that the available economic and price data relied on to apply the price review clause often ends up driving the competing interpretations of the clause advanced by each party.

The danger this evidence-driven approach creates is that arbitrators may fall into the trap of interpreting the clause in the context of (and to work with) a specific methodology, price data or state of affairs. Further, an evidence-driven approach may rely on a fiction (or misunderstanding) of what parties have in mind when agreeing price review clauses. When agreeing a price review clause, parties may not form any common intention about the relevant price data they will use in future price reviews. In fact, the opposite may be true – they may actively disagree about referring to specific price data. This is why price review clauses often use vague words like ‘comparable products’ or ‘alternative prices’, which give both parties scope to argue for their preferred price data in any future price review. Further, price data will change over time (and may become obsolete or out of date). This is another good reason parties are reluctant to tie themselves down when agreeing a price review clause.

One example of the problems that may occur can be seen from considering the interpretation of the words ‘comparable products’ in a price review clause. A tribunal faced with conflicting expert evidence about what were the competing products could focus on this issue at the time the parties agreed the clause or at the relevant review date, or both. If it focused exclusively on the former, it might then decide ‘comparable products’ must refer only to the fuels with which the relevant gas competed when the parties agreed the contract, not the fuels with which it will compete at each future review date. However, that might miss the parties’ real concern when they agreed the long-term contract. They may have foreseen the possibility that a new competing fuel would emerge (or the mix of competing fuels would change) that could undermine the economics on which they had analysed the original contract price and price formula. So, they may have thought their price review clause would look afresh at the basket of competing fuels each time they asked for a review. Yet, the tribunal might interpret the price review clause otherwise. As a result, if they had waived their rights to appeal, the parties would find themselves a few years into their 25-year contract with a decision that could prevent them both from successfully triggering another price review in future. That, in turn, will leave both parties exposed to an unchangeable price formula that, due to market conditions, may place either of them in serious difficulties for the remaining life of the contract.

In conclusion, as with the danger of defining the word ‘significant’ (see above), tribunals should resist the temptation to interpret a price review clause by reference to the economic evidence presented to them at any particular price review. Instead, they should apply the principles of interpretation set out in decisions such as Arnold v. Britton.[27] To do so, in our view, they should give meanings to price review clauses that enable those clauses to work regardless of economic or market conditions at any particular time. Doing otherwise risks the meaning of the clause changing as market conditions change. Instead, arbitrators should try to remain focused on the meaning of the price review clause at the time the parties agreed the long-term contract. That interpretation will not change as the market changes.

Finally, issue estoppel prevents the parties from raising in future proceedings an issue that ‘the parties, exercising reasonable diligence, might have brought forward’ earlier.[28] This presents the parties with an important decision ahead of the first price review arbitration. To what extent should they present evidence about the factual matrix in which the parties agreed the price review clause (as well as the price and price formula)? If they fail to do so, chances are they will be unable to advance that evidence at any future arbitration. However, it is often unpredictable what impact that evidence will have on how a tribunal will interpret the price review clause. Further, if the contemporaneous evidence is confusing or double-edged, using it may detract from the clarity of an argument based solely on the natural and ordinary meaning of the price review clause. So, each party will need to make a careful judgment call about its only opportunity to present this evidence.

Contracts with the same parties and price review clause, but different prices

It is not uncommon, especially in the LNG market, for the same parties to enter into a series of long-term contracts. For example, as an LNG producer opens new trains at its liquefaction plant, often its existing buyers will seek further supplies. In these cases, it is natural that the new contract uses the existing contract as the starting point for negotiations. While prices (and price formulae) and volumes will alter to reflect the market conditions at the time the parties agree the second (or further) contract, other terms may remain the same.

A series of long-term contracts with the same price review clause adds a further degree of complexity (and potential uncertainty) in terms of possible issue estoppel in future price review arbitrations. If, for some reason, the timings of regular price reviews under the different contracts become synchronised, this will increase complexity yet further. This is perhaps best explained through an example.

Let’s assume three long-term contracts exist between the same parties, each with the same price review clause. A price review arbitration takes place under the first contract in time. An award decides the meaning of the price review clause. Further, it applies the facts at the review date (Y) to that meaning, for example to decide that a significant market change has occurred between dates X and Y justifying a change to the contract price. Therefore, the tribunal has made a series of legal and factual determinations about the price review clause and the state of the relevant market at certain times. Meanwhile, a price review under the second contract begins. Does any issue estoppel from the first price review arbitration affect the second?

The simple answer is no. English law says if the same parties enter another contract on the same terms some time later, they may have intended the words in the second contract to mean something different to those in the first contract.[29] English law will interpret each contract at the time it was agreed and within the relevant factual matrix at that time. While that is correct legally, it may appear a curious result to commercial parties who probably agreed to the same terms in the second contract precisely because they intended them to have the same result. So, if one assumes the tribunal for the price review under the second contract involves some (or all) of the same arbitrators as the first, in reality, it is unlikely the arbitrators will interpret the second clause differently. Therefore, the result of the first price review may crystallise the meaning of the price review clause for all future reviews under each of the three contracts.

A similar result may also arise for determinations of fact. Let’s assume, either through coincidence or design, the regular price review cycles under the first and the third contracts become synchronised. Therefore, the review date (Y) for the first price review under the first contract becomes the starting point not only for the next price review under the first contract but also for the first price review under the third contract. However, when the next regular review date falls due under both contracts, the parties only seek a price review under the third contract.[30] Again, strictly speaking, the finding of fact about the state of the relevant market at date Y in the award under the first contract should not result in an issue estoppel in the arbitration under the third contract. Yet, if the new arbitration involves some (or all) of the same arbitrators as the first, again, in reality, they are unlikely to depart from their past findings of fact.

This juxtaposition of legal principle and reality raises several practical issues. First and foremost, it will influence the parties’ choice of arbitrator in later price review arbitrations. Subject to internationally respected rules governing repeated appointments,[31] there is a natural tendency for parties to wish to keep (or change) their party-appointed arbitrator based on experience. So, if the findings of law or fact in the first arbitration suit you, you will try to appoint the same arbitrator again and, if not, the opposite is true. Even if an issue estoppel is not raised, chances are the award in the first arbitration will find its way into the second arbitration (given there would be no issues of confidentiality). Therefore, it (and any common arbitrator’s views it may reflect) will have persuasive, if not legal, force in the second arbitration. Almost inevitably, the perceived ‘loser’ in the first arbitration may then face an uphill struggle to convince the second tribunal to depart from the reasoning of the first.

Second, it questions the sense in copying price review clauses between different contracts (or synchronising regular price reviews). While doing so may be natural and save time and money when negotiating later contracts, if, in reality, parties are fixing the possible result of future price reviews under each contract, there is a significant risk in adopting this approach. Instead, both parties may consider it more sensible to have different price review clauses for risk management purposes, in a similar way to agreeing price formulae with different profiles and results.

How might the arbitrators tackle the second price review arbitration?

Before tackling the psychology of the tribunal’s approach to the second price review arbitration, it is worthwhile recapping where we have reached in terms of the law on issue estoppel. To summarise:

  • if a second price review arises under the same contract, then:
  • the first tribunal’s decision interpreting the price review clause should result in an issue estoppel. This means the second tribunal should apply that interpretation to the relevant facts (e.g., new market conditions) at (or during) the relevant time for the second review;
  • a question mark arises over whether any findings of fact by the first tribunal that remain relevant in the second review will result in an issue estoppel. This will depend on whether those findings of fact were necessary and fundamental to the award; and
  • a second tribunal should be cautious about deciding that any issue estoppel arises; and
  • if the second price review arises under a different contract (even if between the same parties and on the same terms), an issue estoppel should not arise from the first tribunal’s award.

If the second price review is before the same tribunal, a desire for consistency inevitably increases the chances of receiving the same result (whether or not for reasons of issue estoppel), even if it is considering a different contract. Further, to achieve consistency, parties to sequential price reviews under several contracts may decide to agree in advance that the tribunal’s decision on the first contract will bind them in later price review arbitrations under the other contracts. This type of agreement could not only apply to the interpretation of identically worded price review clauses but may extend to findings of fact about market conditions that are relevant to each price review.

Further, if either party correctly raises an issue estoppel (e.g., relating to the interpretation of a price review clause in a second price review arbitration under the same agreement), a different tribunal would err legally if it departed from the first tribunal’s decision. That said, if the tribunal could properly decide there was no issue estoppel (e.g., a price review under a different contract, albeit between the same parties, on the same terms and within the same review period), then strong-minded arbitrators who thought the first award was simply wrong could, quite properly, decide a different interpretation. For reasons that should be clear from complexities of issue estoppel mentioned above, this uncertainty makes it difficult to advise a client to run a second price review based on the possibility that a different tribunal may come up with a new and better interpretation of the contract.

Conclusions

International arbitration practitioners and arbitrators are keen to portray the decisions of arbitral tribunals as at least as predictable as those reached by the most eminent courts. They are right to do so, because many international arbitrators, especially in highly-specialised fields such as price review disputes, can bring to bear knowledge and experience that few judges can match. That said, absent concerns about their awards being subject to appeal, arbitrators may be more willing to avoid the strictures of issue estoppel than an English High Court judge. Therefore, subsequent price review arbitrations can sometimes afford an opportunity to revisit issues that one might have thought were determined finally in an earlier award. Similar possibilities may arise under other long-term agreements familiar in the international energy business, such as joint operating agreements and unitisation agreements, that often ask tribunals (or experts) to redetermine the same issue several times during the contract. Accordingly, understanding the possible scope and application of issue estoppel in arbitration is useful to any practitioner in the international energy business.

Notes


[1]    i.e. 20 years or longer.

[2]    For ease of reference, throughout the remainder of this paper we will refer to these simply as ‘long-term contracts’.

[3]    Lord Wilberforce in The Ampthill Peerage Case [1977] AC 547 at 569.

[4]    Maugham LC in New Brunswick [1939] AC 1 at 19-20.

[5]    Lord Wilberforce in The Ampthill Peerage Case [1977] AC 547 at 569.

[6]    Of course, whether it is ‘the same issue’ will be central to the application of issue estoppel and will form a considerable part of the discussion in this article.

[7]    Fidelitas [1966] 1 QB 630 (CA); followed in Aegis [2003] 1 WLR 1041 (PC).

[8]    Or the outcome of an expert determination: see Kendall on Expert Determination, 5th. Ed., Sweet & Maxwell 2015, paragraphs 12.9-3 and 13.3-3.

[9]    Spencer Bower and Handley, Res Judicata, 4th. Ed., Butterworths 2009 (Spencer Bower).

[10]   Spencer Bower, paragraph 8.27.

[11]   For such a discussion, please read ‘If you start to feel the pinch, will a price review clause ease your suffering?’ by Matthew Vinall [2009] IELR Issue 1, 13.

[12]   Spencer Bower, paragraph 8.01.

[13]   Dixon J in Blair v. Curran [1939] 62 CLR 464 at 532.

[14]   Good Challenger Navegante SA v. Metalexportimport SA [2004] 1 Lloyd’s Rep. 67.

[15]   Ibid, at paragraph 50.

[16]   Wigram J in Henderson v. Henderson (1843) 3 Hare 100 at 115 followed by the Privy Council in relation to issue estoppel in Hoysted v. Federal Taxation Commissioners [1926] AC 155.

[17]   JT v. Stirling Council [2007] CSIH 52.

[18]   Spencer Bower, paragraph 8.23 referencing Danyluk [2001] 2 SCR 460, 476.

[19]   This example is a blend of the facts in Hoysted v. Federal Taxation Commissioners [1926] AC 155 and Blackham’s Case (1708) 91 ER 257 (decided at a time under English law when all of the property of a woman automatically vested in her husband upon marriage and she had no property ownership rights).

[20]   Dixon J in Blair v. Curran [1939] 62 CLR 464 at 533.

[21]   Dixon J in Blair v. Curran [1939] 62 CLR 464 at 533.

[22]   See ‘If you start to feel the pinch, will a price review clause ease your suffering?’ by Matthew Vinall, [2009] IELR Issue 1, 13.

[23]   The same would be true if the tribunal decided that trigger conditions had not been satisfied.

[24]   The test articulated in Re Allsop and Joy’s Contract (1889) 61 LT 213.

[25]   Spencer Bower, paragraphs 8.03 and 8.05.

[26]   Moore-Bick LJ in Svenska Petroleum Exploration AB v. Lithuania [2006] EWCA Civ. 1529 at paragraph 109.

[27]   [2015] UKSC 36.

[28]   Wigram J in Henderson v. Henderson (1843) 3 Hare 100 at 115 followed by the Privy Council in relation to issue estoppel in Hoysted v. Federal Taxation Commissioners [1926] AC 155.

[29]   New Brunswick [1939] AC 1 at 20, followed in Shiels v. Blakeley [1986] 2NZLR 262.

[30]   For example, because the revised price formula under the first contract has continued to track the price arising from the valuation mechanism in the price review clause but the price formula in the third contract has not.

[31]   For example, the IBA Guidelines on Conflicts of Interest in International Arbitration.

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