The importance of long-term contracts in various industries has grown significantly. These agreements feature an extended duration, exhibit complexity, and establish interconnected reliance between the parties. Long-term contracts often govern relationships in sectors such as mining, telecommunications, and oil and gas, where cooperation over a prolonged period is essential.
Given the extended nature of these contracts, disputes are almost inevitable. Common areas of contention include performance issues, price adjustments, changes in circumstances, and early termination. Arbitration is often the preferred method of resolution to address such disputes effectively and maintain the underlying relationship between the parties. Its flexibility, efficiency, and ability to adapt to the complex dynamics of long-term contracts make it particularly well-suited to these scenarios.
The Nature of Long-Term Contracts
Over the past several decades, the importance of complex transactions, especially long-term contracts, has increased significantly. The 2016 UNIDROIT Principles of International Commercial Contracts addressed the unique needs of a long-term contract,[1] which is defined as:
a contract which is to be performed over a period of time and which normally involves, to a varying degree, complexity of the transaction and an ongoing relationship between the parties[2]
Long-term contracts thus govern a relationship between the parties over a long period and establish an interconnected reliance between them. Thus, any disputes arising out of such a relationship must be dealt with efficiently so as not to disturb the cooperation between the parties.
Disputes Arising Out of Long-Term Contracts
Long-term contracts are frequently signed in regulated sectors, such as mining, telecommunications, and oil and gas.[3] Considering the length of the contract and its complexity, disputes which might often arise focus on:
– Performance under the contract;
– Price adjustments;
– Changes of circumstances; or
– Early termination.
In many instances, long-term contracts include an arbitration clause, as arbitration permits the parties to manage their complex disputes effectively.
Managing the Complexity of Long-Term Contracts
The dynamic nature of long-term contracts and the interdependency of the parties might create several complex issues during the arbitration, which include the following:
Multiple Claims
The complexity of a relationship created by a long-term contract may cause the Parties to have multiple claims against each other. This complexity often occurs, even in disputes arising from regular contracts. When both parties to a long-term contract have viable claims against each other, the party to file first becomes the Claimant, and the other party becomes the Respondent. This does not mean that the Respondent cannot raise its claims. Most arbitration rules permit the Respondent to raise its claims as either counterclaims or set-off claims.[4] Thus, both parties should be able to present their respective claims in arbitration.
Continuous Performance
Disputes arising from long-term contracts often require continuous performance, which is crucial for both parties. In many cases, even when issues arise during the contract’s operation, maintaining the relationship benefits both parties. To preserve this relationship, disputes should be resolved with flexibility and efficiency. Parties can achieve this goal through arbitration:
The flexibility of arbitration can be an advocate’s most powerful advantage, permitting one to more quickly address the core of the dispute rather than be bogged down in a procedural morass.[5]
Complex Factual Background
Depending on the duration and nature of a long-term contract involved in the dispute, the factual and technical background can be more complex than in other disputes. However, a dispute’s complex factual and technical background is not a significant problem in arbitration. Considering that, in international arbitration, the parties are allowed to select their expert witnesses (which often is not possible in domestic litigation in civil jurisdictions), a party can choose an expert witness with the expertise sufficient to present the technical issues to the arbitrators.[6] Further, depending on the applicable rules, the parties can select the arbitrators.[7]
Ability to Order Specific Performance
Considering the ongoing nature of the long-term contract, many parties might seek a remedy in the form of specific performance. Although the arbitral tribunal’s powers to order specific performance is accepted as one of the arbitral tribunal’s powers, the enforceability of such an order will differ from jurisdiction to jurisdiction. Several arbitration rules, including LCIA, expressly state the arbitral tribunal’s powers to order specific performance.[8]
In Singapore, the International Arbitration Act permits tribunals to order specific performance.[9] A tribunal seated in England and Wales has the power to order specific performance as directly stipulated in section 48(5) of the Arbitration Act 1996:
The tribunal has the same powers as the court—
(a) to order a party to do or refrain from doing anything;
(b) to order specific performance of a contract (other than a contract relating to land);
(c) to order the rectification, setting aside or cancellation of a deed or other document.[10]
Australia took a similar approach. Although the Federal International Arbitration Act 1974[11] does not expressly grant tribunals a right to order specific performance, the Commercial Arbitration Acts of several states (including Queensland, New South Wales and Victoria) directly grant arbitrators the power to order specific performance:
Unless otherwise agreed by the parties, the arbitrator has the power to make an award ordering specific performance of any contract if the Court would have power to order specific performance of that contract. [12]
Conclusion
Long-term contracts, vital in mining, telecommunications, and oil and gas industries, establish enduring relationships that require careful management. Resolving such disputes efficiently is essential to ensure uninterrupted collaboration and the success of these agreements.
Arbitration is the most effective method for addressing disputes arising from long-term contracts. Its flexibility allows the parties to design procedures suited to the complexity of their issues, while its efficiency ensures disputes are resolved promptly, reducing delays and disruptions. Arbitration also preserves confidentiality, safeguarding sensitive business information, and provides international enforceability, making it ideal for cross-border agreements.
[1] UNIDROIT Principles of International Commercial Contracts 2016, Foreword.
[2] UNIDROIT Principles of International Commercial Contracts 2016, Article 1.11.
[3] S. Greenberg, K. Rozycka, Arbitration Under Long-Term Mining Offtake Contracts and Royalty Agreements, GAR, 9 June 2021; M. Perales Viscasillas, Long-Term Contracts: New Regulation for International Commercial Arbitrations, Kluwer Arbitration Blog, 26 July 2017.
[4] See UNCITRAL Arbitration Rules 2021, Articles 4.2.(e), 21.3, 22.
[5] A. Barton et al., The Power of Advocacy: Shifting Mindsets for Successful Arbitration, ADR Blog, 26 July 2024.
[6] Aceris Law, Expert Evidence in International Arbitration, 27 March 2022.
[7] See UNCITRAL Arbitration Rules 2021, Articles 8-10.
[8] LCIA Arbitration Rules 2020, Article 22(ix).
[9] International Arbitration Act 1994 (Singapore), Section 12(5).
[10] Arbitration Act 1996 (England), Section 48(5).
[11] International Arbitration Act 1974 (Australia).
[12] Victoria Commercial Arbitration Act 2011, Section 33A. See New South Wales Arbitration Act 2010, Section 33A, Queensland Commercial Arbitration Act 2013, Section 33A.