A Price Review Clause For a Buyers May Give Flexibility to Natural Gas/LNG Sale and Purchase Contracts – Part II
In part one of this two-part series regarding price review clauses, I discussed whether these clauses are necessary in LNG sale and purchase contracts, and considerations buyers should keep in mind when drafting and negotiating a price review clause. In this second part of the series, I discuss best practices when negotiating new pricing during a price review.
Best practices when negotiating new pricing during a price review
When a buyer decides it wants to put its price review clause to work and negotiate new price, it should build its core negotiating team, along with external advisors. This team’s first task is to understand the entire contract at issue, not just the price review clause. This will allow the team to understand what other terms in the contract are negotiable and what opportunities exist to provide the other side with concessions so a buyer does not have to stray from its desired pricing structure. With the help of their team, a buyer should confirm that the relevant triggering events occurred. After all, if there is no reasonable basis to conclude a price review provision has been triggered, the counterparty will probably have little interest in engaging in negotiations.
Once a buyer determines that price review is available, a buyer should follow the process outlined in the contract. If the negotiation strategy, analysis, and price goal are not fixed or are otherwise undeveloped, it is not advisable to rush into a price review. If a buyer has several LNG sale and purchase contracts with various sellers, it should consider commencing discussions with several at the same time. A buyer can learn a lot from these discussions, which may ultimately result in better, informed terms for a buyer on average. Finally, a buyer should follow the notice requirement, review the notice period, and abide by any other time limits associated with the price review clause.
When a buyer starts a price review, the parties should come away from their first negotiation meeting with a roadmap and timeline for the process. The roadmap should detail the frequency and location of meetings, designate empowered decision makers, and address any other administrative considerations. Everything discussed should be confidential so that communications do not become admissible in a court or arbitration, should negotiations go awry. This confidentiality reduces friction and risk in negotiations, and doesn’t force the parties to be held to earlier positions if they change their mind based on new information, leading to better outcomes for everyone.
Additionally, a buyer should keep accurate and detailed documentation of the deal-making process to ensure clarity at the time of an agreement and in any later attempts at dispute resolution. Parties should document all agreements, meeting minutes, telephone communications, face-to-face discussions, price proposals, and any other contact during negotiations. Besides being clearly documented, these communication channels should be limited to certain people with decision-making authority. For example, it should be made clear who can make a final agreement as to contract price and terms, and those designated individuals should, in most cases, be limited to one or two people. When too many individuals are empowered to agree to price changes, confusion and mistakes ensue.
While keeping all these considerations in mind, a buyer should also remember that, outside any contractual or jurisdictional obligations, there is no rush to agree to a new price. A buyer who hints to a seller that it is in a rush to come to an agreement could reveal that it is under time pressure, which the other side can use to its advantage. Time allows terms to be negotiated fairly. If a seller is willing to move on price if in return it receives a contract extension, a volume increase, or flexibility reductions, or another concession, a buyer will need time to evaluate whether these trade-offs are worth making.
Finally, when pursuing a price review under an existing contract, a buyer should consider the consequences should they fail to reach an agreement, and how that will affect their ultimate business goals for the negotiation. There are generally four different options a pricing review provision can provide for when parties fail to agree on a new price: (i) the contract may continue unchanged, (ii) either party may terminate the contract, (iv) the parties may turn to external dispute resolution, like arbitration, or (iv) the provision is silent as to this issue.
Understanding what could happen if the parties do not come to a new price agreement is crucial in shaping a negotiation strategy and ensuring it aligns with a buyer’s broader business objectives and long-term interests.
Price review clauses are a powerful tool worthy of careful consideration
A price review clause is a potent risk mitigation tool for buyers in LNG sale and purchase contracts. It can drastically change the benefits or burdens such a contract provides or places on a contracting party. For that reason, a buyer should be strategic and intentional when deciding whether to include one in an LNG sale and purchase contract, drafting it in a way that is consistent with their business objectives.