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 50485.
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.

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schoenherr attorneys at law / www.schoenherr.eu