Renegotiation of licensing agreements: Arbitrate to enforce

Both licensors and licensees may wish to consider the inclusion of arbitration provisions in renegotiation clauses of long-term licensing arrangements (typically considered an “agreement to agree” and unenforceable under English law) to avoid uncertainty when seeking to enforce such a provision, following the recent judgment in Associated British Ports v Tata Steel UK Limited.

Associated British Ports v Tata Steel Limited

The terms of a 25 year tidal harbour licence were stated to be subject to re-negotiation which was triggered upon “any major physical or financial change in circumstances”. Following a sharp reduction in steel prices and a strong pound which reduced the competitiveness in the UK’s exports to Europe, Tata Steel (Tata) (inter alia) sought a 50% reduction in fixed fees payable under the licence. In the licence, the parties were stated as having six months from Tata’s notice of the above trigger event to re-negotiate amended terms reflecting the circumstances of the change, or else to refer the matter to arbitration.

Associated British Ports (ABP) brought proceedings against Tata claiming that (i) the terms of the trigger event were too uncertain to bind ABP to refer the dispute to an arbitrator, and (ii) that there were no objective criteria to decide how to amend the licence terms.

Tata sought a stay of proceedings under section 9, Arbitration Act 1996 and was successful, on the following grounds:

• the court was keen to give effect to the re-negotiation clause as it could potentially operate for the benefit of both parties in re-balancing the commercial deal in the contemplation of the parties at the outset, where extrinsic factors could severely prejudice one party’s interests over a long period, and
• the appointment of an arbitrator provided an objective criterion to assess whether the trigger event had occurred and what any re-negotiated terms of the licence should look like.

IP licensing considerations

The court did not anticipate what decision the arbitrator might arrive at, but speculated that  currency exchange rates and steel prices outside of the historic range of fluctuation might be significant factors in the re-negotiation of terms, that re-negotiation was left for the arbitrator.

Parties to patent licensing arrangements (and other intellectual property rights) may wish to approach their agreements differently in light of Associated British Ports and there may be merit in including such a clause, which is subject to arbitration.

1.      Beyond common provisions regarding loss of patent rights, or minor adjustments to minimum royalty payments, additional protection could be sought for more unpredictable scenarios such as adverse changes in market conditions.

2.      Given that the majority of the discussion was around whether a major physical or financial change in circumstances had occurred and that this would have to be referred to the arbitrator, parties to licensing arrangements would be well-advised to be more specific with trigger events if these can be anticipated. Whilst broad ranging clauses will capture a multitude of unexpected events, evidentially these may prove troublesome to enforce.

3.      Licensees may wish to have the capability to re-negotiate minimum royalty rates or fixed licence fee milestones where they are at the mercy of unusually variable market conditions over long periods, such as a materials shortage or price hike for raw materials required to manufacture products which are the subject of the licence agreement.

4.      Licensors may wish to capitalise on the unexpected success of a product by agreeing to re-negotiate licence fees at a later date, particularly where they acknowledge that it may take a product some time to gain traction in the market and have made concessions on fees in negotiations.

5.      Licensors who wish to exclude licence fees (or other terms) from the scope of re-negotiation should do so expressly.

6.      Consider an appropriate pre-arbitration term for negotiations, since the conditions that lead to the desire to re-negotiate may have changed by the time the licence is arbitrated.