- Arbitral Award
- ICC International Court of Arbitration 9994
LONG-TERM CONTRACTS - LICENSING AGREEMENT - BETWEEN FRENCH AND UNITED STATES COMPANIES - SUPERVENING HARDSHIP - PARTIES UNDER A DUTY TO RENEGOTIATE CONTRACT - REFERENCE NOT ONLY TO THE LAW GOVERNING THE CONTRACT (FRENCH LAW) BUT ALSO TO THE UNIDROIT PRINCIPLES (ARTICLES 6.2.2 - 6.2.3)
Claimant, a French company, entered into a license and sales agreement with Defendant, a US company, whereby the latter was granted the right to make, use and sell products derived from raw material supplied by the former. When after a certain period of time Claimant considerably increased the price of the raw material due to the more stringent conditions imposed upon Claimant by a Governmental Agency for the collection of human placentae from which the raw material was extracted, Defendant terminated the contract. According to Claimant the termination was unlawful because Defendant should have agreed to renegotiate the price so as to adapt it to the new circumstances.
The contract was governed by French law. In deciding in favour of Claimant, the Arbitral Tribunal, after stating that "French law requires from each party to perform the agreement in good faith (cf. Article 1134(2)- rectius: 1134(3) - of the French civil code) [and] good faith imposes upon the parties the duty to seek out an adaptation of their agreement to the new circumstances which may have occurred after its execution in order to ensure that its performance does not cause, especially when the contract at stake is a long-term agreement, the ruin of one of the parties", pointed out that "this principle is also prevailing in international commercial law (see UNIDROIT Principles Articles 6.2.2 and 6.2.3)".
On [the matter of whether the respondent was right or wrong to refuse delivery of the raw material at the new price], the Arbitral Tribunal finds that the issue of the alleged existence of an oral agreement between Messrs [A, of claimant company] and [B, the respondent's CEO and negotiator of the contract] to renegotiate the Agreement in case of more stringent demands of the [government agency] regarding the approval of the product can be left undecided as can also be left undecided the question of a possible application of the so-called “merger” clause of article 9 (c) of the Agreement to the alleged oral agreement and to the subsequent confirmation letter of May 24, 1997. Assuming that on these two issues, [Respondent]'s contention should prevail, this would not discharge [Respondent] from its duty to renegotiate the agreement in the event that the conditions set forth by French law for such a renegotiation would be met – “the law of France” is the substantive law to be applied to this dispute ... As correctly stated by [Claimant] ..., French law requires from each party to perform the agreement in good faith (see c. civ. 1134, al. 2). Good faith imposes upon the parties the duty to seek out an adaptation of their agreement to the new circumstances which may have occurred after its execution, in order to ensure that its performance does not cause, especially when the contract at stake is a long term agreement, the ruin of one of the parties (see Terré, Simler, Lequette : Obligations, No. 414 & foll. and 446 ; Malaurie and Aynès : Les obligations, § 622 p. 359). This principle is also prevailing in international commercial law (see Unidroit Principles, art. 6.2.2 and 6.2.3).
As it is recalled ... supra, when negotiating the agreement, the parties were under the impression that the [government agency] would not impose a control placenta per placenta, although they did not exclude such an eventuality. Now, some time after the signature of the Agreement, the [govemment agency] required individual donors’ screening and that severe demand was certainly one of the cause [sic] of the increase of the cost of the [raw material] well above the US$ ... per gram agreed upon in the Agreement. If one relies on Mr [C, witness]'s fax addressed to Mr [D, negotiator of the contract for the claimant] on January 30, 1990 ..., this was certainly a somehow unexpected event. Furthermore, the fact that the “Force Majeure Clause”, as per clause 9 (f) of the Agreement, did not expressly contemplate the risk of a potential regulatory change, does not “per se” exempt [Respondent] from renegotiating the contract price as, according to the French doctrine quoted thereabove, this duty is already imposed upon the contracting parties by the rule of good faith and that rule cannot be defeated by any divergent contractual provisions. Therefore and on this point, the Arbitral Tribunal finds that due to the new request of the [government agency] relating to the control of the placentae, [the party to the original agreement assigned to the claimant] was entitled to a renegotiation of the contract price, but that does not mean at all that [said party] was entitled to impose upon [Respondent] its own view on what should be the correct price.’
Force majeure clause
'The Agreement contained a force majeure clause which reads as follows:
"Force majeure: Neither party shall be responsible for any losses if the fulfilment of any terms or provisions hereof shall be delayed or prevented by civil disorders, wars, acts of enemies, acts of God, fire, storm, flood, riot or strikes or by any other cause not within the reasonable control of the party whose performance is interfered with, and which by the exercise of reasonable diligence, such party is unable to prevent." (see clause 9 (f)).
It should here be noted that at a certain stage of the negotiations, [the party to the original agreement assigned to the claimant] proposed a "Force majeure" clause covering “any changes in the economics of placental processing due to any cause not within its control”... [Said party]'s proposal in this respect was not accepted by [Respondent] and this is evidenced by the actual drafting of clause 9 (f) of the Agreement which does not specifically address the risk of a potential regulatory change. However, according to Mr [D]…, this particular risk was covered by the so called "side letter" allegedly sent by Mr [E, negotiator of the contract for the claimant] to Mr [B] on May 24, 1989 …}}
Excerpt in ICC International Court of Arbitration Bulletin, 2005 Special Supplement, pp. 79-80.}}