- Arbitral Award
- Nº 1/2008
- Câmara FGV de Conciliação e Arbitragem (São Paulo, Brazil)
- Delta Comercializadora de Energia Ltda. v. AES Infoenergy Ltda.
LONG-TERM CONTRACTS - ENERGY SUPPLY CONTRACT - BETWEEN TWO BRAZILIAN COMPANIES
REFERENCE TO UNIDROIT PRINCIPLES IN SUPPORT OF CONCLUSION REACHED UNDER APPLICABLE DOMESTIC LAW (BRAZILIAN LAW)
POWER SUPPLY AGREEMENT BETWEEN TWO BRAZILIAN ENERGY TRADERS – UNFORESEEN SUBSTANTIAL INCREASE IN POWER PRICE - ALLEGED HARDSHIP AND CLAIM FOR TERMINATION ACCORDING TO ARTICLE 478 OF BRAZILIAN CIVIL CODE – CLAIM REJECTED - REFERENCE TO ARTICLE 6.2.1 UNIDROIT PRINCIPLES STATING THAT THE MERE FACT THAT CONTRACT PERFORMANCE ENTAILS HIGHER ECONOMIC BURDEN FOR ONE OF THE PARTIES DOES NOT AMOUNT TO HARDSHIP
Plaintiff, a Brazilian energy trader, in May 2006 entered into a long term agreement with Defendant, another Brazilian energy trader, whereby the former would supply the latter an average of 22 MW of electric energy on a monthly basis from January 1, 2007 through December 31, 2011 and the latter would pay the former an agreed price which was to vary annually.
In January 2008, Plaintiff suspended delivery of the power and commenced arbitration proceedings against Defendant, arguing its right to terminate the contract on the grounds of hardship, and claiming damages for having been exposed to the “spot-price” established for short-term energy transactions by the Chamber of Trade on Electric Energy.
According to Plaintiff there had been an exceptional increase in the cost of its performance in the months prior to arbitration which amounted to hardship arising from an unforeseeable change in the circumstances.
According to the regulation of the Brazilian energy market, delivery of the power is directly made by the seller into the national integrated system while the buyer may withdraw it at any other point of the system. Any difference in the amount supplied or withdrawn is priced under a “liquidation price” (“spot price”) established for short-term energy transactions by the Chamber of Trade on Electric Energy. Moreover, the party who has provided less power than promised has to pay a fine.
Plaintiff argued that between January 2007 and January 2008 there had been an extraordinary and unexpected increase in power prices in the short-term market which affected the supply agreement entered into with Defendant. Such an increase amounted to a fundamental modification of the contractual balance as well as an unjust enrichment of Defendant, allowing Plaintiff to claim termination of the contract for “excessive onerosity” under Article 478 of the Brazilian Civil Code.
The Arbitral Tribunal pointed out that given the dynamic nature of the power positions held by the players in the energy market it can be expected that they permanently harmonize their positions so as to assure both compliance with their contractual undertakings and maximization of their results, and that deviations in this route stem from different degrees of risk-taking by each player in the marketplace, which, given the particular features of this market, correspond to an ordinary contractual risk. Stressing the principles of legal certainty and the binding character of the contract, central in Brazilian law, the Arbitral Tribunal found that in the case at hand there had been no rupture in the economic environment on which the parties had based their agreement and rejected Plaintiff’s claim for termination based on Article 478 of the Civil Code. According to the Arbitral Tribunal not only was there no change in the circumstances amounting to excessive onerosity of the contract, but there had been no extreme advantage for the other party, as required cumulatively by law.
Moreover, in support of its conclusion the Arbitral Tribunal referred to ICC case 8486 in which the sole arbitrator had noted that “the termination of a contract for unforeseen circumstances (´hardship´, ‘clausula rebus sic standibus´) should be allowed only in truly exceptional circumstances”, and that Art. 6.2.1 of the UNIDROIT Principles expressly provides that the fact that the performance of the contract becomes more onerous for one of the parties does not suffice to assume that there is ´hardship´.