May 4, 2017

Arbitration clauses: the importance of being certain

It is always important to ensure that any arbitration agreement is clear and actionable in the manner that the parties intended. This includes the circumstances in which the arbitration may be triggered, as shown recently in Associated British Ports v Tata Steel UK Ltd [2017] EWHC 694 (Ch).

ABP v Tata

A dispute arose following Tata Steel UK Ltd's (Tata) request to renogotiate the terms of a 25-year licence agreement (the Licence) with Associated British Ports (ABP). Tata sought to alter the Licence under clause 22, which stated:

'It is hereby agreed between the parties that in the event of any major physical or financial change in circumstances affecting the operation of [Tata's] Work at Llanwern or Port Talbot or ABP's operation of the Tidal Harbour…either party may serve notice on the other requiring the terms of this Licence to be re-negotiated…if agreement is not reached within a period of six months from the date of the notice the matter shall be referred to an Arbitrator.'

Tata argued that factors including significant increases in the imports of steel to Europe, increased tariffs by the United States and a strong pound had all undermined the competitiveness of UK-manufactured steel. ABP disputed that any of these fell within the definition of 'major physical or financial change', as they are all circumstances that regularly impact on the steel industry.

ABP applied to the English court for a declaration that the clause was too uncertain to be enforceable. Tata applied for ABP's claim to be stayed under section 9(1) of the Arbitration Act 1996 (the Act) on grounds that the dispute was properly to be resolved by arbitration under clause 22.

The court considered whether clause 22 was void for uncertainty under section 9(4) of the Act which states that: 'On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.'

In deciding this, Rose J adopted a liberal approach. She held that the mere fact it may be challenging to interpret a clause should not prevent the court from seeking to give effect to the parties' intentions where possible. She relied on the recent decision in Astor Management v Atalaya Mining [2017] EWHC 425 (Comm) that:

the role of the court in a commercial dispute is to give legal effect to what the parties have agreed, not to throw its hands in the air and refuse to do so because the parties have not made its task easy

She noted that, furthermore, the court will be more ready to uphold a particular clause if one or more of the parties have already partially performed their obligations.

Accordingly, she found that despite it being a challenging task for an arbitrator to define 'major physical or financial change', the parties had intended that an arbitrator would settle their differences on any renegotiation of the Licence under clause 22 and so the clause was sufficiently certain. ABP's claim was therefore stayed.

The importance of being certain

Despite Tata's success in this instance and the court's liberal approach, it is nevertheless paramount to ensure that arbitration agreements are clear and enforceable, and not subject for debate. 

Dispute resolution agreements are often not properly reviewed by parties when negotiating contracts. This can be a costly mistake. Under section 9(4) of the Act, there is a real risk that an uncertain arbitration agreement will be declared void resulting in significant uncertainty concerning the resolution of the dispute.

Even if the arbitration agreement is ultimately upheld by the court, a dispute as to its meaning will inevitably waste costs for all parties and cause significant delay. Ensuring arbitration agreements are as clear and as certain as possible should therefore be at the forefront of parties' minds during any negotiations.

In this instance Tata could have protected its position by including a list, ideally an exhaustive one, outlining what constitutes 'a major physical or financial change', and providing guidance, ideally a set of criteria, to assist the arbitrator in how to amend the terms of the Licence. This would have ensured there was far less uncertainty as to when arbitration could be triggered in the circumstances, and so could potentially have avoided the proceedings.