GAR Live Energy 2017 closed with a heated debate of the motion – “This house believes that there’s no law in gas pricing arbitration”.
Gas pricing disputes have provided much work for arbitration specialists in recent years, with some commercial parties returning to arbitrators time and time again. But as cases go, these matters stand out. The key role is often played by experts.
So, are lawyers even required?
Four leading names debated just that during the final part of the four-session event.
Shai Wade of Stephenson Harwood moderated the debate, with Mark Levy of Allen & Overy and Gisele Stephens-Chu of Freshfields Bruckhaus Deringer arguing ‘for’, and Ben Holland of Squire Patton Boggs and Paul Griffin of White & Case ‘against’.
The audience voted before and after the debate, resulting in a sizeable swing for one side.
Arguments used include:
- Lawyers may hear these disputes, but they aren’t acting as lawyers when they do: “they behave like commercial men and women”;
- If there are legal points – such as competition law or procedural points – they are peripheral;
- Lawyers are only appointed as arbitrator because it’s hard to find experts unencumbered by conflicts – and because lawyers like to deal with their own kind;
- The key decision in a case is always driven by economic evidence and market data; and
- Parties choose arbitration for its finality and privacy only, not because they have a legal problem to unknot.
- Parties could appoint non-lawyers or go to expert determination and they don’t. Ergo, they expect legal skills;
- Every case comes down to contractual interpretation at some point;
- Published awards show the tribunal engaging in “pages and pages of analysis of the words” [in a contract for the supply of Norwegian gas, for example]; and
- Economics may determine the outcome of a case, but law determines “what games the players are playing” – and whether there will be a game at all.
As always, the debate was judged by an independent panel – Sophie Nappert of 3 Verulam Buildings, James Spigelman QC, an independent arbitrator, and Baiju Vasani of Jones Day, who also pronounced their own views.
The following transcript is an edited version of the discussion. Since speakers were asked to “play up” to their assigned role, not all of the views they expressed are necessarily firmly held. It has been organised in five parts:
Part 1: Presentations for, and against, the motion
Part 2: Judges’ questioning
Part 3: Audience questions
Part 4: Closing submissions
Part 5: Audience and tribunal verdict
Shai Wade: “This house believes that there’s no law in gas pricing arbitration.” The first thing we are going to do is vote on who in the audience supports the position, and who opposes it. Then I will introduce our panel. After the arguments are put, the panel of judges will ask questions and make a point or two to the advocates; you will then be invited to ask questions or make any burning points you have. Following which, you will vote again to see if the audience has been swayed by the arguments it has heard. After that, our panel of esteemed judges and arbitrators will announce their decision.
Who supports the motion that this house believes that there is no law in gas pricing arbitration? Hands up! A wonderful minority of six. Who opposes the motion? 16. Is there anybody who has not yet formed a view? Most people, it seems, are undecided.
We have an amazing group of advocates to present both sides of the debate.
Shai Wade introduced the speakers.
These advocates have a short time to present their cases. The leaders each have a luxurious six minutes to present their arguments and the seconds a miniscule five minutes to present theirs. The judges may interfere with questions if they have something to say, and then I will give more time to the advocate speaking.
Part 1: Presentations for, and against, the motion
Mark Levy: Good afternoon esteemed panel. I am speaking in favour of the motion and would like to start by asking you to consider a hypothetical. In this hypothetical, we have a Nigerian gas producer and an Italian importer, who have agreed in principle to sell energy into Italy under a long-term gas sales agreement. They have agreed to quantities, flexibility of supply, duration and the specification of the gas. They have agreed on destination flexibility, but there is no agreement on price. So, they meet in the buyer’s offices in Milan and start a discussion.
The seller starts by saying he needs a competitive price for gas going into Italy. The buyer explains how competitive the market is, talks about growth on pricing, the squeeze on margins, the difficulties in certain sectors, and the margin he needs to market the energy economically. Then they have a further discussion to reach agreement on those different points. They discuss market development and whether the market is quite as competitive as the buyer suggests. They talk about prices and other suppliers to Italy. They talk about customs’ data. Finally, after three or four days, they reach an agreement. They’ve got a deal and sign their acceptance.
Now, the reason I put that hypothetical to you is that a question arises: would anyone describe that as a legal discussion? Is it likely, during that discussion, that the Nigerian seller or Italian buyer would justify their position by reference to legal principles or clauses from the civil code? Of course not. It’s a commercial discussion conducted by marketers. It is unlikely that lawyers would have gone anywhere near the room.
If one accepts that proposition – and one must accept that proposition – it follows that there is no law in gas pricing arbitration because gas pricing is effectively exactly as I have just described. The only difference in gas pricing arbitration is that, if the parties can’t reach an agreement, a tribunal imposes one on them. Does it do that by looking at contracts? Does it do it by looking at the judgments of Lord Denning? Of course not. It looks at the same criteria I have discussed above. It looks at market developments, margins, prices, net balance, customs’ data, etc. It comes up with a commercially reasonable and fair price: not a price dictated by legislation; not a price determined by reading a judgment from the Court of Appeal in 1842. A commercially reasonable price.
It does so by listening to expert evidence and the argument. Why does it do that? Because the tribunal, unlike the Nigerian seller or the Italian buyer, doesn’t have the information in its head. It needs to be informed and that is how it is informed. If it had that information, it would not need to hear the legal argument or the expert evidence. Tribunals don’t behave like lawyers when they determine these disputes: they behave like commercial men and women. Which is why many people, including my erstwhile colleague Peter Griffin, have argued that arbitration is not a problem-equal process in which these disputes should be determined.
That is not to say that there cannot be separate legal disputes which are ancillary to the pricing disputes. One does occasionally see disputes arise, say about competition or procedural issues, but they are rare and not relevant to this motion because they are not pricing disputes. A competition dispute is a competition dispute. Just as in our hypothetical, the Nigerian seller and Italian buyer would no doubt have separate rooms, with separate lawyers drafting production sharing agreements and worrying about competition arguments and what would it take to keep the bidding going. These things have nothing to do with the pricing dispute. For those reasons I commend this motion to the judges.
Ben Holland: Of course there is law in gas pricing arbitrations. You were invited to consider a hypothetical. Let us assume instead a real example. Let us assume that at the end of a busy day, a group of lawyers return to their homes. They have been in a conference room together all day and three lawyers have been deciding and listening to arguments from other lawyers in this conference room in front all manner of different lawyers contributing to the process. Now, all these lawyers return to their homes and report back to their families on what they have been doing all day. What would the situation be if each of those lawyers were to report to their families that what they had been doing had nothing to do with the law?
They would be greeted with incredulous questions from sons, daughters, wives and girlfriends. Simply, what were you doing there? What was the point of assembling a group of lawyers in this formal process if your primary skills had no bearing whatsoever on the process in which you were engaged? That’s why, in the reality of a price review hearing, as opposed to a price review negotiation, you are engaged in what is an intensely difficult legal dispute. That’s why it stands to reason that the law is at the very heart of any price review arbitration.
You can test that another way. Energy-industry contractors have some of the most common references to expert determination found in any sector in the world, and gas supply contracts particularly are littered with parties electing, at the time they reached their agreement, to send certain disputes to be decided by experts. It could be to do with the quantities of gas; it could be the quality of gas. Even embedded in many price review dispute clauses is a provision saying that, if the price marker stops being published, that is determined by an expert process and not by an arbitration.
The fact that the parties, at the time of contracting, elected to disregard expert determination as the means to resolve their price review disputes, suggests that in no way is a price review arbitration the preferred domain. It is clear that the parties wanted a more formal and legal process, and they selected that at the time of signing the contract.
To prove a point, wouldn’t it be a perfect sort of arbitration if there were no law at all? It would attract a certain sort of arbitrator who would no doubt enjoy playing Sherlock Holmes and deciding the facts, without having to consider the law or the possibility of ever being wrong. That has not been the way that this specialist industry has developed. Indeed, some of the most technically skilled, most legally proud lawyers, serve regularly as price review arbitrators, some of whom are in this room. They are proud of the way they deploy the law to their advantage and are not people who would consider that the process in which they are engaging had nothing to do with the law.
Let’s take two examples of why law is at the very essence of what needs to be determined. Many of you will already know – and those of you who don’t are very lucky not to know this – but if you were to begin the price review dispute you would first very commonly trigger one. You would need to identify, for example, the fact that something had changed in the relevant market that needed to be updated. You would need to set that out and tell your counterparty that that was your opinion.
Let’s say you then start talking about what the new pricing would be and decide, as you continue this process and move to arbitration, that it might be helpful to add a new point that was not in your notice. What if you then try and develop that into a new formula that is nowhere in the notice? It would be an existential question to the tribunal whether it was appropriate to allow that party to argue for that formula after not having notified the other party at all.
And how would they decide that? They would grasp any guidance they could find. And where will they find the guidance? In the contracts, in the arbitration agreement, and they will need to consider the scope of their mandate. To do that, they would need to consider whether you can, for example, take into account the negotiation history of the contract, and that would depend on national law and the law of contract. And that is why, concluding my remarks, this is a legal process.
Baiju Vasani: Mr Holland, do you accept that there is less law in this area than in an ordinary commercial tribunal?
Ben Holland: I dispute that. Whenever an arbitrator properly wishes to address themselves as to the state of their mandate, they will need to consider their powers, the arbitration agreement and the contract. That requires them to have regard to the law of that contract and arbitration agreement. Mark and I just rolled off a case where the trial index alone was 141 pages long and a lot of those were legal authorities from different jurisdictions. It must be the case that there is law in any price review. In any footnote, any submission, you will have cases coming out of your ears. All of this suggests that the law is at the heart of the price review, and will remain so.
James Spigelman: Your central proposition was that law is at the heart of the process. It seems to me that you have established that lawyers are at the heart of the process. I’m not sure if that’s the same thing.
Ben Holland: As night follows day, wherever there is law, you will find a lawyer chasing the problem and answering the question – and you will find another lawyer answering the same legal question in the exact opposite way. Once you, members of the tribunal, suggest that lawyers are needed, in my view this proves our point and demonstrates that law must be at the heart of the issue.
Gisele Stephens-Chu: Mark has explained that the function of arbitral tribunals in gas pricing arbitrations is to step into the shoes of the parties and act like commercial men and women. That proposition is amply illustrated by the following statement in Esso v Electricity Supply Board, a well-known decision in the English courts. I quote: “Setting a long-term price taking into account all the relevant factors involves a substantial element of commercial judgment; it also depends on the parties’ negotiating strengths. Prices set by negotiation in the marketplace are likely to reflect on average all the factors that have a bearing on the outcome more reliably than the assessment of any arbitrators.”
So, when adjusting the price and the price revisions, tribunals invariably defer to the commercial terms that parties initially agreed. That is natural because those are negotiations and renegotiations between buyers and sellers, who are not lawyers, they are commercial negotiators, and they are operating within a highly sophisticated industry.
Of course, interpretation is invariably approached by looking at the words in their commercial context. That is apparent from two well-known awards published by the ICC that analysed paragraphs of pricing provisions in a contract for the supply of Norwegian gas. There you see pages and pages of analysis of the words, always conducted within a commercial context, using references to commercial indemnity, market prices and the negotiating history between parties. But nowhere, ladies and gentlemen, do you see any reference to the principles of Norwegian law, which is the governing law.
As to the application of the price review provisions, again there is no place for legal principles because the criteria are essentially financial or economic. The triggers are about the passage of time or the occurrence of certain economic changes. The price adjustment criteria are based on the need to reflect the value of gas at different levels of the market, the need to ensure the marketability of prices or to restore, or re-establish, the specific risk allocation determined by the parties.
Is a tribunal of lawyers going to look to the law to apply these criteria properly? No, a tribunal of lawyers will be guided by factual and expert evidence. It is typical in gas pricing arbitrations for tribunals to be confronted with a host of expert reports on a range of issues, such as developments in the gas markets, developments on a macro-economic level, on a regulatory level and on the value of gas. Experts and industry specialists give their opinions on the appropriate economic risk allocation in practice of gas supply agreements in general, and you will also see reports setting out complex calculations on pricing, value and profitability.
In other words, in a gas pricing arbitration, the heart of the matter is the economic evidence and the market data. That is what takes centre stage, and that is what you see in many awards. The resolution of gas pricing disputes, therefore, turns on the tribunal’s ability to understand and assess that evidence to reassure itself that the parties’ commercial criteria have been met.
I would like to conclude by recalling why the parties set these criteria in the first place. They set them because they wanted to ensure a commercial outcome. They use arbitration, this formal process, to reach a binding and enforceable result in the event that they, themselves, cannot reach agreement on price. They don’t use arbitration to see the law reach an outcome that they would never in their wildest dreams have envisaged in a commercial negotiation. Accordingly, I would like to commend this motion to the judges.
Sophie Nappert: Mr Moderator, if I may? Why is it that there are scarcely any experts sitting on arbitration tribunals? Why are three lawyers looking at your motions? Why do we not see more of those who have that expertise, rather than have to be educated through lawyers?
Gisele Stephens-Chu: I submit that that’s because the arbitrators are appointed by the lawyers, and lawyers like to appoint their own kind.
Mark Levy: There are two other answers as well. Firstly, it’s because it’s a legal process. People are more comfortable appointing arbitrators in a legal process to make sure that it’s done properly. It doesn’t affect the substance of the issue they want to discover and, when you’re an arbitrator, you’re interested in the ability to understand issues that arise in gas pricing arbitrations. The second, which is a real problem, is it’s very hard to find an expert who can sit as an independent arbitrator.
Paul Griffin: Members of the tribunal, it’s clear that gas pricing arbitration is not a matter of breach liability in management. It’s unusual. But it’s still less a matter of termination of the parties’ long-term agreement. It’s a matter of resetting terms in circumstances the parties could not know at the time that they entered the agreement. The parties’ intentions at that time, long ago, are paramount, and they’re to be interpreted from the agreement they made. And that interpretation is a matter of law. There is much law on long-term relational agreements, from where terms are to be revised in changed circumstances.
Ascertaining the substantive law of the parties’ long-term gas or LNG agreement is itself a matter of law. And whether the law is of New York or England and Wales or, less usually, civil regimes, that law will be central to assessing trigger provisions, the obligations and discussion phase, and the setting of any revised terms. But when the clear intentions of the parties to have an arbitral price review were frustrated by the court in Esso v ESB, that turned on a legal analysis. When the court refused a stay in Tata, Carter Steel’s recent arbitration request in respect of a price review under a long-term agreement, that turned on legislation and legal analysis. Before that, it was Gas Natural and Atlantic LNG, where the Court of the Southern District of New York decided that the tribunal’s rewriting of the parties’ agreement was within the tribunal’s powers, despite the parties’ submissions. They did so on the basis of law, and interpretation of the parties’ agreement.
Looking simply at the agreement to the duty to meet and seek to agree, which is usually part of the provisions, it is notable how often matters of reasonable endeavours, good faith and agreements to agree come before the courts in long-term relational agreements. Reasonable endeavours: recently in Jet2 v Blackpool Airport, the Court of Appeal looked at those provisions. Good faith in contract performance? The Yam Seng case, and that theme is still being developed in Globe Motors, now in the Singapore Court of Appeal. An agreement to agree went part way through that established relationship. Most recently, Astor Management. Cases, cases, cases. Law, law, law.
And if the law is prevalent in these issues, it’s a hard-line common law, like English law. Think what civil law means: structure is recurring, periodic pricing reviews and a long duration of arbitrations. But what it said, as a finding, was: “In your previous review, under this same contract bind the later review.” It’s a matter of law but, depending on the governing law, the answer looks quite different as to whether that is admissible or not. Edison and ENI? Nicely on point.
Which gas pricing arbitration in relation to a state in the EU does not involve considerations of competition law? Some would say it’s the last refuge of the scoundrel, but there it is. Whereas English law tends towards abstraction and a traditional preference for texts over context, not all laws will seek meaning in the agreement’s words alone. Constitutions may apply and codes providing for hardship. There is a great deal of law that sits in gas pricing arbitrations.
Shai Wade: I want to thank our panellists for making their submissions within the time allotted.
Shai Wade introduced the judges.
Baiju, you have the first question.
Part 2: Judges’ questioning
Baiju Vasani: Mr Griffin raised a number of legal issues that have arisen in the context of previous arbitrations. Hypothetically speaking, could you have a gas pricing arbitration where law does not arise? I understand that it could arise and legal issues do arise but, hypothetically speaking, could you have a gas price arbitration where the law didn’t arise?
Ben Holland: Just hypothetically, yes.
Mark Levy: It’s absolutely possible; it happens all the time. I wouldn’t accept the proposition that the kind of disputes that Paul described actually fall within the scope of gas pricing disputes. If you’re talking about genuine pricing disputes, i.e. what price shall we set in the light of market developments, that’s a purely commercial, economic judgment. There’s no law: there’s no assistance.
Sophie Nappert: Does that not present a problem for your arbitration tribunal in this jurisdiction? Because under the gas price industry, the jurisdiction of the arbitration tribunal stems from the arbitration clauses rolled up in the contracts. If you’re asking the tribunal to decide a dispute disregarding those – if you don’t have a clause in the contract saying the tribunal shall apply the rules of the industry, or whatever – and the tribunal disregards the law and just goes with commerciality, does it have a common jurisdiction?
Mark Levy: It would do if it was disregarding the law, but I’m not suggesting that they disregard the law. I’m saying they’ve reached their conclusion without having to reach any formal legal judgment because what they’ve been asked to do – and what they have jurisdiction to do – is effectively a commercial exercise.
Sophie Nappert: Are you hoping that it requires more specific wording in the contract to provide them with that option of going purely with the economics?
Mark Levy: No, because that’s what the process is about. The role they have been asked to perform is completely different to most other disputes. They are simply being asked to perform a commercial exercise that the parties have already done once, but are unable to repeat.
Ben Holland: It’s quite clear that the tribunal has the support of the parties also, in relation to earlier observations about the prevalence of lawyers as arbitrators, as opposed to experts. It may be that the qualities and quantity of expert evidence has a significant role to play in the outcome, but you need to get to first base. You need to decide what game the players are playing. To do that, you have to have clear regard for what the scope of the job is that the arbitrators are going to do. Ultimately, any dispute will be determined by the terms of the mandate imposed on the tribunal. To get to that point, whether you are playing tennis or cricket, you need the tribunal to have close regard to what game the parties should be playing. That is why there must be a legal question, having regard to the scope and appointment of the arbitration.
Mark Levy: Could I perhaps add, on the hypothetical question, that there was a time when gas pricing disputes were negotiated, and arbitration provisions were then in place. These agreements very often have tiered mechanisms which move up through the organisations and we’re dealing with some of the largest, most sophisticated corporations in the world in this client base. Why is it then that they return to a group of lawyers to settle their commercial differences? If you were not involved, they would do the deal themselves. It is only in recent times, where commercial pressures are so strong, and the feeling of entitlement and legal rights so great, that the move has gone to arbitration. It’s a necessary condition of being in arbitration that there is a legal dispute.
James Spigelman: This is for Mark. He dismissed some of the issues that arise as ancillary and redefined the question as saying, “gas pricing arbitrations are only about gas pricing”. I can see why you could dismiss as ancillary trigger questions where any bona fide negotiation or discussion is about to happen. What do you say about Paul’s point as to the precedential value of a previous award between the same parties under the same contract? How can you dismiss that as an ancillary question?
Mark Levy: Personally, I am not aware of that ever actually arising in practice in any price reviews. It’s very hard to think how you could get a true res judicata with an issue estoppel dispute in a genuine pricing review. I think you could get an issue estoppel situation arising in an ancillary dispute, but with pricing you approach each new situation in light of the economics at the time. It just doesn’t arise.
Ben Holland: Mr Chairman, the scope of res judicata is a paradigm example of how law is existential to the questions to be decided by the tribunal in any set price review. The amount of a previous award will or will not bind the subsequent tribunal into an intense issue of law. Depending on the position of Swiss as opposed to English or US law, there will be very different outcomes.
Shai Wade: We will allow you each another question, in whichever order you wish, and then open questions to the audience.
James Spigelman: I have a question for Ben and Paul. When you say, “appoint lawyers to run the case or appoint lawyers to the tribunal”, that must be because they know something about the law. Wouldn’t it also be because of counsel’s advocacy skills and capacity for persuasion, and because tribunal members from the law have an ability to assess alternative case law and make decisions that take that into account?
Ben Holland: The reason why lawyers are appointed is not just because they are hired guns capable of arguing the point. You could have politicians or PR people, who are able to compellingly put forward their point of view. No, not at all. This is a legal question and so the most talented lawyers will be in it. This would otherwise become an actors’ guild, if there were no law at all.
Shai Wade: You’ve made that point already, so next question please.
Baiju Vasani: I feel that one could invent a software program and you could type in what happened, and the software could spit out what the answer should be. Is that something that would help? Secondly, one side is repeating: “It’s law, it’s law, it’s law.” When I go for my weekly shop, I enter the shop and buy a loaf of bread: it’s a commercial transaction, but it’s also called a legal transaction. You could argue that everything you do here when you sign up for a ticket is legal but, ultimately, it’s commercial. Are you not hiding behind the façade of legality, rather than the essence, which is absolutely commercial?
Gisele Stephens-Chu: In relation to your first comment, there’s always an element of judgment, which is why these questions end up in this formal process, but the judgment is made on the basis of commercial criteria. It’s not just a matter of spitting out a formula: there’s a lot of evidence and data to be considered. And there’s a certain amount of judgment and estimation but, at the end of the day, there is a reason why these questions need to be considered in a process such as arbitration.
Ben Holland: Yes, of course. One is that this is a process which is moving forward. Putting aside the trigger of whether that is effective, we are forward-looking, often for very many years. Exactly the issues which were in the damages panel are similarly relevant in a gas price review, which is looking to re-set for the future. The principles are legal principles and expert evidence is clearly very important for the legal principles. The other point, that everything is a transaction, is largely the case and relational theory is exactly that.
Shai Wade: Can we please have questions from our audience?
Part 3: Audience questions
Mark Beeley: Ben, in your argument you made the point that this used to be a domain where you had expert determinations in gas pricing arbitration. I would still suggest that these are questions which an engineer or a pricing analyst is able to answer with no legal background. What’s so rarefied about gas price arbitration that involves the law?
Ben Holland: It is important that we understand that in any standard price review clause there’ll be two approaches set out. If the index you’re tracking happily by agreement stops being published, the appropriate replacement marker would be a matter of expert determination. If you want a price review, that is very commonly a matter that goes to arbitration. But directly responding to your question - for parties deciding whether to choose arbitration, there is something important in the character and the scope of a price review arbitration which leads them to prefer to write into the contract an arbitration, a quasi-judicial process, as opposed to an expert determination, with its appearance of flexibility. It is not part of our case that there has been a reduction in the number of expert determinations. We’re simply saying that, in this same clause, the parties agreed a twin-step process and favoured a law-driven process for pricing the arbitration.
Shai Wade: A question from Juliet now.
Juliet Blanch: I so wish I had watched the two of you doing your gas pricing arbitration against each other. It must have been hysterical. This question is for Mark and Gisele. Looking at the actual wording of the motion, it doesn’t say it means that there’s no law in gas price arbitrations, once jurisdiction has been determined, or there’s no law in some gas price arbitrations. It’s that there’s no law in gas pricing arbitration per se. Can you comment on your arguments in the light of the actual option?
Mark Levy: There is clearly a distinction between a gas pricing arbitration and a gas pricing arbitration that has a jurisdictional dispute or a competition law dispute. Clearly, a competition law dispute is a legal dispute. The motion – and I’m sure someone put a lot of thought into it – clearly has no meaning at all if it encompasses non-pricing disputes.
Gisele Stephens-Chu: I would add that when you go into a gas pricing arbitration, the reality you’re faced with is reams and reams of expert reports of data. The notion that we’re going in there to fight sophisticated legal arguments is completely flawed.
Audience member: A question for the tribunal, if I may, on the scope for mandates. Quite often tribunals give the parties guidance on the contract, or their view of the market, with the perception that the parties are then best placed to carry that into effect in how they revise the formula. I’m interested in whether you think tribunals are really qualified to look at the commercial questions, and rewrite sometimes quite dramatically where that’s been requested, and sometimes where it hasn’t been requested.
Sophie Nappert: I have found that no matter how experienced, astute and commercially minded the three lawyers of the tribunal are, at the end of the day they don’t know the disputes and commercial aspects half as well as the parties in front of them and their experts. Especially with the dynamics of a gas price review arbitration, which is not: “You’re right; you’re wrong.” Quite the opposite: you’re looking forward to keeping the marriage going. One would have thought that the sophisticated parties in this dispute would keep that in mind, and the tribunal would take baby steps and say: “Please go away and try to see if you can’t get together.” I have found a lot of times that, because of the high political stakes of these disputes, the parties and their lawyers become very entrenched and adopt an approach that is litigious.
Shai Wade: Do we have any experts in the room who have served as technical or quantum experts in gas pricing arbitration? Is there anyone who would admit to that? Apparently not…
Audience member: My question would be that the quantum phase for gas price arbitration is a lot of commercial analysis. If you have an event which is claimed as a trigger, and both parties accept that an event has occurred, but the disagreement is over whether that event is sufficient to trigger a price review, doesn’t that then become a matter of law?
Mark Levy: I don’t see why that is a legal question at all. What law, what judgment, what piece of legislation would help to determine whether a trigger event has occurred?
James Spigelman: The law of contractual interpretation would be a good place to start.
Mark James: I’m Mark James, Berkeley Research Group. I’ve spent the last 30 years doing pricing increases and arbitrations. The question I would like to ask each of the panel, and if they could give me a yes/no answer that would be excellent, is - if you have a price review and you could have five different laws – Norwegian, New York, English and Welsh law, and so on – would you expect the same result, independent of which law you had, in terms of having to come up an interpretation of the contract, which often requires an understanding of the law regarding the interpretation?
Sophie Nappert: Yes.
Mark Levy: The answer is definitely yes.
Paul Griffin: The answer is that the outcome would be different, and the reason for that is primarily because it might be relevant to take into account the negotiation history of the contract to decide what the parties intended. Whether or not you are entitled to take into account the parties’ negotiation history depends on the choice of jurisdiction.
Shai Wade: One final question from a technical expert.
Matthew Vinall: I’m not a technical expert, just a lawyer from Denton’s, I’m afraid. Just a couple of observations, then a quick question. I’m a little disturbed that the issue estoppel in a price review has been dismissed when I’ve written a book on that subject! Second observation: while the economic evidence in all the gas price reviews I have worked on almost inevitably swamps the legal arguments in terms of the complexity and the time devoted to it, that doesn’t detract from the fact that every gas price review arbitration I’ve worked on has raised legal issues. I would be surprised if there was anyone here who has acted on a gas price review arbitration that didn’t face any legal issues.
The final point – and this is where the question comes in – is something Sophie said. I’m disturbed that there’s been a lack of focus on the price review clause itself, and the objective criteria within that clause as to how the arbitrator should go about determining the review. Simply to say this is just a commercial exercise to agree what the parties should agree, in my mind that’s just wrong.
Shai Wade: OK, since you answered the question yourself, we’ll move to closing submissions, following which we will have another audience vote. So, Mark, over to you.
Part 4: Closing submissions
Mark Levy: The other side has argued its position admirably, but all that they have established is that arbitration is a legal process in which lawyers engage, which is not new or, in fact, relevant. Parties choose arbitration because it’s confidential and provides a binding outcome. The fact that lawyers are involved just reflects the fact that it’s a legal process. It doesn’t mean that there are legal issues any more than, in my hypothetical, the fact that the Nigerian seller and the Italian buyer were engineers means that their deal involved engineering matters.
Gisele Stephens-Chu: Just to pick up on two of the so-called legal issues raised by our opponents. The first one being the scope of the mandate? Is that really a legal question in practice? Is it really informed by the governing law? The answer to that is no. Tribunals invariably do not look to legal principles. They go to the parties for active statements on industry practice because what they are trying to discern is what information should be exchanged by the parties so as to allow them to assess whether to accept or reject the price review request. So, again, a commercial issue informed by commercial and industry practice. Secondly, with respect to res judicata and issue estoppel, as Mark has said, one doesn’t see the issue arising. The reason for that is because each gas price arbitration stands on its own specific price review request within the context of specific market circumstances, as defined by the terms of the price review clause. It would simply not be appropriate to discern any precedential value from an award which, by the way, is confidential and so cannot be relied on by a different tribunal in a different proceeding. Each arbitral award stands on its own and cannot create a precedent.
Shai Wade: Thank you very much.
Paul Griffin: Long term agreements in the gas industry are relational documents. They begin with an MOU, which a lot of people liken to a courtship. Heads of agreement are the engagement, and the SPA, a marriage. The pricing review comes up during an established relationship because the parties never agreed a pre-nup. That’s the reality. Benjamin Franklin said: “Keep your eyes wide open before marriage; half shut after.” That is what is being enacted through each gas price arbitration. Matters of substantive law. Have you got a qualitative or a quantitative truth? A legal question? Is your adjustment a matter of evolution or revolution? Again, these are matters of law.
And if there is no law in gas pricing arbitration, why was the Lord Chief Justice in last year’s Bailey Lecture moved to express concern that significant cases – and look at the amount of money involved in gas pricing arbitrations – are being lost by courts to arbitration? The motion before you today is: “Is there no law in gas pricing arbitration?” It doesn’t say “a little bit of law” or “not much law”. It says “none”. It’s for our learned friends to show “none”, not even “a little bit”. Unless you believe that there is no merit in anything we’ve had to say today, we ask you to find in our favour.
Part 5: Audience and tribunal verdict
Shai Wade: Thank you very much. We have very little time left, so think very carefully and please put up your hands. Those in favour of the motion? Nine? Those who are against? Thirty-five. Any undecideds? None. Panel of judges, have you formed a view which is unanimous?
James Spigelman: We have. It struck me that the structure of these arbitrations is a bit like the old capitalism in the mid‑west of the United States during the 19th century. You’ve got a town that can’t afford one lawyer, but can always afford two. What you’ve got is a process on which the advocates for the motion tried to put a particular interpretation. There was no context to this interpretation. It was just: “Well, gas pricing arbitrations are about gas pricing and nothing in the gas pricing decision is legal.” We’ve come to the view that that was not a reasonable interpretation of the process, and that even those advocating for the motion admitted that there were ancillary issues that were legal. We never got a good response to the issue estoppel point that is at the heart of the gas pricing process. If there is some binding precedent, it’s a bit like the precedent that one zombie movie looks like every other zombie movie. But, whatever, it’s a precedent and it goes to the heart of the gas pricing issue. So, even in that context, even on the top-down interpretation of the question, the negative case should win. And that’s the view of the tribunal.
Shai Wade: Thank you all very much for your contribution. Let’s thank our tribunal and our advocates.
GAR Live Energy Disputes was held on 15 June 2017 at Clyde & Co’s offices in London. It was sponsored by Clyde & Co, Vinson & Elkins, 20 Essex Street, Cornerstone Research, Curtis, Mallet-Prevost, Colt & Mosle, FTI Consulting, Geotext Translations and RGL Forensics.