This Client Alert seeks to highlight certain recurring issues and themes arising in the context of long-term commodity supply and off-take agreements. It draws upon the recent collective experience of our lawyers as well as developments in the law.
We focus on the following key topics:
A. Agreements to agree
- The long-term supply (or off-take) agreement (“LTSA”) should not have too many ‘open ended’ provisions that require further agreements between the parties in order for the agreement to work in practice as they may jeopardise the contractual force of the agreement.
- Always try to provide a default mechanism in case parties cannot agree.
- English law will sometimes fill the gaps with implied terms based on previous dealings between the parties, market practice or reasonableness.
B. Price review (price reopener) clauses
- Consider whether your LTSA requires a price review clause – the usual answer is ‘yes’, because significant changes can occur in reference prices, markets, and/or economic dynamics over the term of a LTSA.
- The usual structure is that one party can invoke the price review, then there will be a time-limited negotiation process and then a final determination (e.g. by arbitrators or expert) or termination if no agreement can be reached.
- Hard-wiring a regular annual/quarterly price review is increasingly common.
C. Entire agreement clauses
- These are a common ‘boilerplate’ clause seeking to prevent reference to material outside the written contract.
- They can be ineffective or have unintended consequences, so drafting appropriately is key.
D. Unforeseen events
- The length of LTSAs mean that the force majeure provisions must be carefully thought through, not just lifted from a standard short/spot contract.
- Similarly, standard sanctions, material adverse change and compliance clauses need to be adapted for LTSAs to cater for likely significant changes over time.
E. Operations and logistics
- Delivery scheduling, transport, storage, quality, documents, customs, laytime and demurrage provisions are often insufficiently set out in LTSAs.
- When agreeing a LTSA, parties often assume a high degree of logistical and operational cooperation, but provisions must be robust enough to deal with the uncooperative party looking for an exit strategy.
F. Termination and suspension of obligations
- Typically, LTSAs provide for a detailed list of termination events, plus a range of options such as single shipment rejection or suspension, which are short of complete termination.
- Also, anti-technicality or ‘cure’ provisions may be added to avoid unjustified or quick terminations.
G. Damages and remedies for breach
- The LTSA draftsperson needs to consider a damages limitation provision as a priority because long-term contract breach generally equates to significant damages.
- Consider a formulaic approach to damages for certain breaches as well as limitation.
H. Dealing with government entities – state immunity
- If your counterpart is a state entity, work out what provisions are required to overcome state immunity.
I. Dispute resolution
- What type of dispute resolution will be fit for purpose in case of a dispute?
- Remember disputes come in different sizes – default on the whole LTSA or demurrage on one shipment: is your clause suitable for all the potential disputes?
- Interim remedies may be vital to reduce damage or secure your position: is the clause specific enough to facilitate such remedies?
Read the full Client Alert by downloading the .PDF below.