Tata purported to give notice of a “major financial change in circumstances” and asked ABP to negotiate amendments to the Licence including a halving of the licence fee paid by Tata.

ABP sought declaratory relief from the High Court, arguing that clause 22 was void for uncertainty. Tata brought an application for a mandatory stay of those proceedings pursuant to section 9 of the Arbitration Act 1996, under which the court is obliged to stay proceedings “unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.”

Uncertainty

ABP argued that clause 22 was void for uncertainty in two respects:

i. the “triggering event” - “any major physical or financial change in circumstances” - was too uncertain to be enforced; and

ii. there were no, or insufficient, objective criteria to guide an arbitrator as to the precise amendment(s) of the Licence terms. Clause 22 was akin to an ‘agreement to agree’, such agreements not being enforceable under English law.

The triggering event

Rose J, giving judgment, noted a number of authorities that demonstrate that the court should strive to give meaning to contractual clauses wherever possible. Quoting Moore-Bick LJ in Jet2.com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417, she stated that:

“… there is an important difference between a clause whose content is so uncertain that it is incapable of creating a binding obligation and a clause which gives rise to a binding obligation, the precise limits of which are difficult to define in advance, but which can nonetheless be given practical content.”

Rose J noted that the wording of clause 22 did not leave the scope of the trigger entirely open-ended. Where one can identify changes which would definitely fall within the scope of the phrase “major physical or financial change in circumstances” and some which would clearly fall outside of it, the phrase “is sufficiently certain to be enforceable even though it may be difficult in the abstract to draw the precise divide between changes falling on either side of the line.”

While deciding whether or not clause 22 had been triggered might require detailed submissions and evidence from witnesses or experts, the court held that an arbitrator would be able to come to a reasoned conclusion. The issues are not ones that are impossible to answer. Accordingly the term concerning the trigger event was not void for uncertainty.

Amending the Licence

ABP’s second argument was that there were no criteria by which an arbitrator could decide how to amend the terms of the Licence. The term was, according to ABP, akin to an ‘agreement to agree’ and was therefore void for uncertainty.

Rose J held that the clause was not as open-ended as ABP asserted and highlighted that an arbitrator would not be faced with setting new terms in a vacuum. Instead she found that: “[t]he existing terms show what the parties considered to be a fair and reasonable bargain in the circumstances that prevailed at the time the Licence was entered into. That provides a useful starting point.”

Accordingly, the court found that clause 22 was a binding obligation to refer a dispute to arbitration and the trigger was not too uncertain to be enforced (although whether a triggering event had occurred was a matter for the arbitrator). The court was accordingly obliged to stay the proceedings before it.

Impact

The decision in ABP demonstrates the English courts’ reluctance to find contractual clauses unenforceable for uncertainty. Where an agreement provides for a third party to settle new terms without setting parameters for those terms, the third party can be guided by the contract itself and the circumstances surrounding the contract.

The judgment emphasised the long-term nature of the agreement (for further discussion of long-term contracts please see our previous client alert.The same approach would not necessarily be taken towards a shorter-term contract where neither party had substantially performed its obligations or where the contract does not require significant cooperation and capital investment by both parties.

An example of this can be seen in the recent judgment in Teekay Tankers v STX Offshore [2017] EWHC 253 (Comm). The clause in dispute provided that in the event Teekay exercised an option for the building of additional vessels, the delivery date of the vessels was to be “mutually agreed” by the parties. Walker J acknowledged that “the court should strive to give effect to the bargain made by the parties if it is possible to do”. However, on the facts he felt unable to find that an objectively reasonable delivery date should be implied. To do so would be inconsistent with the clause requiring delivery dates to be “mutually agreed”. Consequently, the clause giving Teekay the option, and thus the option agreement itself, was unenforceable.

The decision in Teekay highlights the importance of taking care when drafting clauses that provide for future terms to be “agreed” or “negotiated”. The agreement in Teekay provided for one-off ‘options’ and contained no consideration of what would happen should the parties be unable to reach agreement on those options. Had the contract contained a term requiring the delivery date to be set by an independent expert or an arbitrator if the parties could not reach agreement, the outcome might have been the same as it was in ABP.

Practical guidance

• English courts and tribunals will strive to give effect to contractual terms (and contracts) wherever possible, particularly when faced with long-term contracts that have been substantially performed.
• Where a clause requiring future (re)negotiation is needed, parties should consider including appropriate processes for the conduct of the (re)negotiation. In particular:
  • whether, in the event of non-agreement, the issue can be referred to a third party for determination (e.g. an arbitrator or an ‘expert’);
  • what the triggering event(s) for the clause and/or the subsequent referral would be and how such event(s) can be measured/assessed, if appropriate; and
  • whether parameters can be stipulated to provide guidance to the determining third party as to appropriate terms/evidence to be considered.