Dispute Resolution

Adjusting contracts in arbitration?

Arbitrators decide legal disputes – in lieu of state courts. But do arbitrators also enjoy the power to adapt contracts to changed circumstances?

Long-Term Contracts and the Need for Adaptation Over Time

Twenty or even thirty years can be a long time. Still, under many commercial contracts the parties agree to be bound to their bargain for such terms – be it in the field of energy, infrastructure, joint ventures, or others. Needless to say, these long-term contracts are inherently susceptible to change. A lot may happen in twenty or even thirty years: Governments rise and fall, the economy slows down and picks up again, society changes. All such changes may affect the original bargain of the parties. Typically, parties do expect circumstances to change. Hence, there is hardly a long-term contract which goes without some sort of “revision clause” (ie contractual adaptation clause).1

Once a change manifests itself, typically years after the contract was concluded, the parties generally do not happily agree on how to adapt their agreement – or on whether to adapt it at all. Since most (long-term) contracts of commercial weight refer disputes arising out of such contracts to arbitration, this is the point at which the parties turn to the arbitrator asking for an adjustment of their contract.

However, contrary to what one might expect, it is not at all clear whether a disagreement on how to adjust a contract on the basis of a contractual adaptation clause qualifies as a “legal dispute” and hence may be subjected to arbitration at all.

The Traditional View: Contract Adaptation by way of Expert Determination

Arbitration is dispute resolution. Accordingly, under the traditional Austrian view, an arbitrator can only “resolve legal disputes”.2 Dispute resolution is understood as the act of adjudicating pre-existing rights. The creation of rights pro futuro would not fall under this traditional perception of arbitration.3

The Better View: Arbitrators can Adapt Contracts

Convincing arguments speak against this restrictive approach though: It is no longer true that rule-making would inherently be excluded from the judicial function exercised by judges and arbitrators. Rather, looking at the competences of state court judges, one can conclude that judges, too, enjoy certain rule-making powers and, importantly, powers of contract revision.4

An arbitrator will typically – disregarding for once the field of non-arbitrable subject matters such as family or tenancy law – enjoy at least the same decision-making competences as a state court judge. This is known as the principle of synchronized competences. Hence, arbitrators will enjoy at least the same power to adapt a contract as state court judges. But state courts’ powers to adapt contracts are not undisputed: There is – still – a strong sentiment that “judges do not make contracts” (iudex non substituit). Judges should, under this approach, only interpret but not create or shape private contractual relationships.

Consequently, one must go one step further: The proposition is that an arbitrator’s powers in general and those to revise contracts in particular can go beyond that of a state court judge. Indeed, the fact that arbitration is to the exclusion of state court litigation does not necessarily mean that an arbitrator’s competences could not be wider than the excluded competences of the judge. This can be seen, most prominently, in Section 603 para 3 ACCP, which stipulates that arbitrators may decide ex aequo et bono if so authorized by the parties. State courts, on the other hand, cannot be authorized to decide “in equity”.

Hence, it appears that arbitrators acting under the Austrian Code of Civil Procedure do enjoy the power to adapt contracts – even if and where the state courts’ powers to do so end. And arbitral practice proves this right: As one recent example, a Vienna-seated tribunal modified a contractual price formula in a case between RWE and Gazprom.5

Primarily, the above holds true for contract adaptation on the basis of adaptation clauses that are sufficiently determined (ausreichend bestimmt) for the purposes of Austrian contract law.6 One might, however. even consider whether a “general” adaptation clause that would not be sufficiently determined under this standard might still be enforceable in arbitration: The argument would be that the arbitrator – but not the state court judge – can be empowered to decide ex aequo et bono, which means he/she can be released from the strict application of the law (including, possibly of Section 869 Austrian General Civil Code). It remains to be seen whether arbitral practice and the practice of the Austrian (annulment) courts would indeed subscribe to such approach.

Conclusion: The Parties have the Choice

Now that it has been established that arbitrators can enjoy the power to adapt contracts, what role will be left for expert determination in this area? The answer will likely be: the parties have the choice. The parties may either intend to have their contract revised by an arbitrator or else by an expert – depending on their expectation of the process, as well as of what happens if they are dissatisfied with the decision. Typically, the parties’ interests in commercial long-term contracts will call for contract adaptation by arbitration.

Depending on the joint intention of the parties, contract adaptation on the basis of a contractual revision clause can either be effected in arbitration or expert determination.

Contract revision may also be based, more generally, on the principle of clausula rebus sic stantibus (foremost on the doctrine fundamental change of the contractual foundation).
Cf. Section 581 of the Austrian Code of Civil Procedure.
Along these lines, the Austrian Supreme Court held in a decision of 1985 that “the adaptation of a long-term contract to changed circumstances” on the basis of a respective contractual clause would not be arbitration (i.e. Schiedsrichtertätigkeit), but rather expert determination (i.e. Schiedsgutachten); OGH, Feb 27, 1985, docket no. 1 Ob 504/85.
Eg Irrtumsanpassung, Section 872 of the Austrian General Civil Code, or change of contractual foundation (Änderung der Geschäftsgrundlage).
Award of 27 June 2013.
Section 869 of the Austrian General Civil Code.