The bridges between rebalancing clauses and renegotiation clauses

Rebalancing clauses, like renegotiation clauses, are particularly important in the turbulent world we live in; think of galloping inflation, the war in the Middle East and Ukraine, and a little further away but very impactful, the Covid crisis.

These two types of clauses aim to maintain contractual balance following the occurrence of new circumstances after the conclusion of the contract.

In rebalancing clauses, the contract is modified on the basis of defined parameters and the application of these clauses is automatic; thus, rebalancing is frequent in the energy sector and is often governed by legal standards1.

Renegotiation clauses are much broader and generally cover any unforeseeable change in circumstances not attributable to the party invoking it and which disrupts the economics of the contract; as the name of the clause indicates, the parties must then renegotiate the contract by restoring the contractual economy as it had been taken into account by the parties when contracting. The parties can only be advised to carefully mark out the renegotiation procedure; by organizing the form well (duration of the renegotiation, presence of persons with the power to bind the company, establishment of renegotiation minutes) the chances of success of the renegotiation increase. The form marks out the substance.

Good faith and contractual balance will be the compasses of the persons, in particular the arbitrators, responsible for carrying out this rebalancing in these two types of clauses.

Some clauses are on the border between rebalancing clauses and renegotiation clauses; thus, for balancing, in complex adaptation formulas, the clause may provide that it will be an expert and not the parties themselves who will adapt the contract. Another example of what is included under rebalancing clauses: the competing offer clause, which can be defined as follows
“a party to a contract agrees to provide its partner with more favorable conditions than it would agree to a third party in a similar contract.”2
This is then a classic rebalancing clause; but it often happens that the clause provides not for automatic adaptation but for a renegotiation of the price; for example, the following clause:
“… the parties will consult with a view to seeking arrangements acceptable to both parties, the seller retaining in any event the right of preference to the conditions of the competing offer”3
This is then a hybrid clause.

The same is true of the most favored customer clause; the price is fixed in the long-term contract but if the seller offers a lower price to another buyer, he is obliged to lower the fixed price to align it with the lower price agreed with the other buyer; but here too, the clause may provide not for automatic alignment but for renegotiation4.

In French public procurement law, a circular was published on the occasion of the price increase due to Covid and the war in Ukraine in 20225; the circular does not provide for an automatic price adjustment but for renegotiation, despite the fact that the parameters are well defined; what is more, the administration’s co-contractor will be able to rely, in addition to the circular, on the theory of unforeseeability; let us recall that in this hypothesis, the contractor will have to prove the unforeseeable and excessively onerous nature of the increase in costs. This shows once again the complementarity between rebalancing clauses and renegotiation clauses.

In legislative texts, we also find renegotiation in the event of targeted parameters. Thus, Article 1664 of the Italian Civil Code provides, in the matter of a contract of enterprise, that in the event of an increase in the contractor’s costs of more than 10%, the contractor may request a renegotiation (and not an automatic adaptation) but 10% of the increase must remain his responsibility6.

Price adjustment clauses do not prevent the arbitrator from adjusting the contract due to unforeseeable circumstances. Thus, in the American case Alcoa v. Essex7, a long-term aluminium supply contract had been concluded between the two aforementioned companies; the price adjustment clause had been drafted by Alan Greenspan, former head of the Federal Reserve Board. The price variation was based on the WPI (Wholesale price index). When the oil crisis occurred in 1976, the surge in oil prices had not been adequately taken into account in the aforementioned index; Alcoa had been operating at a loss for several years (more than 60 million dollars) while Essex was growing richer compared to the market price; despite the presence of a revision clause