WHAT IS THE ROLE OF ARBITRATORS IN THE SUBSTANTIVE QUESTION OF CONTRACT ADAPTATION: WHEN THERE IS NO EXPRESS AUTHORIZATION BY PARTIES?

Article by Nitya Jain

Introduction

The parties may opt to expressly authorize the tribunal to adapt the contract in case of unforeseeable event(s). Such express authorization establishes the primacy of party autonomy and, consequently, can have a decisive influence on the determination of an arbitrator’s power to adapt the contract in question.

Parties, however, often leave the contract silent on this matter making it difficult for the tribunal to fashion a remedy based on their implied intent. The tribunal is a creature of parties’ consent. It has to make sure that it never goes beyond its authorized jurisdiction and eventually does not overrun parties’ autonomy. Again, Challenges to the final award on the ground of jurisdictional overreach is not a novel phenomenon. This question was extensively discussed in the case of Kuwait v. The American Independent Oil Company (AMINOIL, 1982) wherein the tribunal held that a tribunal by no means can adapt a contract without express authorization of parties. Thus, the Tribunal needs to turn to the applicable substantive and procedural law.

In an arbitration, the relevant substantive and procedural law have completely distinct areas of operation. This conflict becomes vehement on the issue of contract adaptation.

Arguments against Contract Adaptation by an Arbitral Tribunal

A Tribunal has the power to rule on its own jurisdiction to check whether it has the power to adapt the contract. Further the wordings of the arbitration agreement are checked to look out for the power the agreement renders upon the tribunal. Furthermore, The Tribunal needs to establish that the applicable substantive law (often being the contract law) allows for contract adaption as a remedy or if granting such remedy is exclusively reserved for the national courts. While not many domestic laws today support the idea of contract adaptation, some prominent legal systems do envisage it. The German law proposed a solution to the problem of no authorization- it suggests the principle of supplementary construction that authorizes the tribunal to adapt the contract to the extent that such adaption is in line with the hypothetical intent of the parties. However, this power had to be used in the strictest of its sense. Further, traces of not using implied terms of contract to authorize adaptation can be found in both English and American contract laws.

The Tribunal needs to establish whether the applicable arbitration law envisages such power of the tribunal. For example, while this issue arose during the negotiation of the UNCITRAL Model Law, the drafters decided not to address it in the text of the model law as such a provision would stretch the procedural law into the peripheries of substantive law. This makes the adaption way beyond the authority of an arbitral tribunal.

Furthermore, the question arises whether an arbitrator has adequate knowledge to adapt the contract? Often Contract adaptation demands modification of the terms of the contract. There can also be a shift in the rights and liabilities of the parties. This very remedy more often than not,is not only beyond the legal authority of the arbitrator but also sometimes beyond his or her competence. Contract adaptation implicates complexities of contract and trade, especially when it aims at future co-orporation of the parties. Quite often, contract adaptation effectively requires the tribunal to rewrite/alter the contract, or add certain clauses. Not every tribunal is competent to understand the nuances of that particular trade and are appointed to resolve a specific legal dispute. The contract might also be too complicated for being modified by a party who is not an expert in the field of trade. It is still possible for a tribunal to adapt the contract when the concern is related to price increase or minor fluctuations. However,  It becomes really difficult, if not impossible, to rewrite a multifaceted contract on, for example, a mining venture, earthquake, delivery of a plant after the occurrence of a war, etc.

Arguments for Contract Adaption by an Arbitral Tribunal

On the other hand, in recent times there is a wave in favor of authorization of the arbitration tribunal to adapt the contract. In absence of express authorization tribunal goes to look for implied authorization, interpretation of contract itself and applicable substantive and procedural laws. There still exist certain countries where substantive law supports adaptation – Poland, Germany, France set out such examples. The primary argument is that the extensive jurisdiction for arbitral tribunals provide that the term “dispute” should be interpreted in a broad way, including the power to adapt contracts when the need arises. The term “dispute” encompasses any kind of dispute, difference, disagreement, or claim that may be asserted in arbitral proceedings and covers all circumstances where one party demands something and other party refuses to provide it.

Further, arbitration agreements are generally interpreted broadly. The arbitration clause which binds the parties to settle “all or any” disputes through arbitration should be interpreted in way that “any” dispute also includes claims for an adaptation of contract and that makes it contractual claim.

Furthermore, parties’ implied intent is rendered heed as to know whether parties actually wanted to adapt the contract. Generally, if a party includes hardship clause or a force majeure clause it intends to adapt the contract and not terminate it in case of unforeseeable circumstances as adaptation is the remedy of hardship. The insertion of a hardship clause is an explicit demonstration that the contracting parties are willing to undertake revision of the contract, if unpredicted circumstances make performance of the contract excessively onerous for either of the parties. Past negotiations of the parties also reflect such a choice. Finally, arbitration is considered a one stop shop, i.e. parties generally intend that all disputes are to be decided by the same tribunal since they selected arbitration as a one stop shop else. Excluding a remedy from the competence of the arbitration tribunal would, hence, defeat the core purpose of arbitration. This holds even more correct in case of long term contracts.

Conclusion

It is the dynamic pattern of international contract law which advocates in support of a broad competence of international arbitrators to adapt contracts. An approach that supports the co-operative and complex long-term transactions than just one-time exchange of goods and money is gaining rapid support by numerous domestic legislations and scholars on international commercial arbitration. When parties include an arbitration agreement in their contract, it is indicative of the fact that they intend to resolve all disputes between them by arbitration, be it substantive question of contract adaptation. Further, if the hardship concept is to be accepted as a general principle of substantive law, the resulting procedural power of tribunals should also be generally accepted.  Principles of good faith and fair dealing also tilt the balance in favour contract adaptation by arbitrators. Also, Long-term contract requires adaptation in case of a change of circumstances, rebus sic stant ibus being the inherent principle in any such contract in application, also of good faith and fair dealing being the cornerstones. Conclusively, this phenomenon of an arbitrator adapting a contract is a major shift towards the pro – arbitration paradigm.

 

Author’s Bio :

Nitya Jain

She is a 3rd year BA LLB student from Institute of Law, Nirma University, India.