The Renegotiating Clause in Petroleum International Joint Venture Agreements
Talal Abdulla Al-Emadi
June 2, 2012
Oxford Student Legal Studies Paper No. 04/2012
Foreign investors and host states rely for the protection of their interests on contractual clauses aiming at maintaining the integrity of their contracts and precluding any modification of the ventures except by mutual consent. Petroleum International Joint Venture Agreements (JVAs) involve the commitment of significant capital for a very long duration. For example, the classic forms of Stabilisation Clauses were introduced by foreign partners as a mechanism to prevent the host state from taking action by virtue of its sovereign power that might affect oil and gas agreements. Unlike some forms of classic Stabilisation Clauses, which try to prevent unilateral modification, Renegotiation Clauses are known to recognise the mutability of the contract and allow for changes in the contract. Renegotiation Clauses aim to protect the parties to oil and gas joint ventures by making the contract flexible and dynamic throughout its duration, in order to adapt it to changing circumstances and, more particularly, to re-establish the contractual equilibrium of the transaction. This article is devoted to a discussion of renegotiation.
Section B begins by defining what is meant by the term renegotiation, and argues that we only need to distinguish between two different renegotiation situations, namely, anticipated renegotiation and involuntary renegotiation. Section C focuses on and discusses some reasons for renegotiation. I explore three such reasons, and in so doing, I look at some arbitration cases that have taken place in the petroleum industry. Apart from illustrating the point that renegotiation is a fact of life in any long-term commercial relationship, the case analysis should also help us understand the factors and forces that trigger renegotiation. To avoid confusion in this section, I shall not discuss cases that do not directly concern renegotiation. Two such cases described in the literature are Phillips Petroleum Co (UK) Ltd et al v Enron Europe Ltd. and Mobil Oil Iran, Inc. v. Government of the Islamic Republic of Iran. This is because I believe that the importance of the Enron case lies not in the reasons for renegotiation but the difficulties that can arise in the enforcement of a clause – ie is it an agreement to agree or not. The Mobil case, on the other hand, is about negotiation in relation to the termination of a contract and not about renegotiation. The article then, in section D, discusses the change in circumstances concept. On one hand, according to the concept of sanctity of contract (pucta sunt servanda) a contract is an expression of the parties’ free will and choice; as an exercise of the parties’ freedom and autonomy, as such, it should be honoured and not be interfered with by the court. The terms of the contract must be implemented to the letter no matter how onerous or burdensome they may prove to be. The change of circumstances concept, on the other hand, has been recognised by many major legal systems of the world, ie England, United States, France, and the Vienna Convention on the Law of Treaties (1969). Hence, some writers, rightly, argue that, based on the change in circumstances concept, parties in oil and gas agreements can overcome the sanctity of the contract principle in order to adjust the contract. We shall therefore quickly highlight those major legal systems that have recognised the change in circumstances concept. The aim is to see whether or not those legal systems have recognised the change of circumstances similarly. The comparison is important in case parties to oil and gas agreements are put in situations where there are no contractual clauses that provide for renegotiation. If parties face a case where no contractual term provides for renegotiation but where an obligation to re-negotiate under the general law is argued, then much will depend on the applicable law. For example, if the law governing the agreement is English law, the result may be different from when the law governing the contract is the law of France.
Number of Pages in PDF File: 39
Keywords: Renegotiation, Change of Circumstances
Date posted: June 6, 2012