Prelude to Arbitration?

Arbitration, North America

Presented here was an attractive alternative to the cost of arbitration for the producer and buyer who disputed the definition of Market Price for a petroleum derived product. As the recognized industry expert, Baker & O'Brien was able to analyze the limited market with confidential pricing information to establish a price that best fit the Market Price definition. The expert report was used in the decision on how to resolve this matter.

A producer of a high value petroleum-derived product entered into a multi-year contract with a large buyer who used the product in a derivative manufacturing operation. Under the contract's pricing provision, the producer agreed to notify the buyer each year of next year's "Market Price," which was defined as, "...the average price charged by other United States producers for comparable product for delivery in North America."

In one year, the producer notified the buyer of a substantial increase in the Market Price-which the buyer objected to as being above that referred to in the Market Price definition. Because at the time of the dispute, there was only one other North American producer of comparable product, the contractual Market Price was, in effect, the average price charged by this second producer to its North American buyers-of which there were only three. The buyer filed an arbitration claim under the contract.

The contract's arbitration clause required, prior to the convening of the panel, that the parties engage an oil industry expert to undertake an independent assessment of the contractually-defined Market Price. Such assessment would rely on confidential pricing information from both parties, as well as from the three North American buyers. Baker & O'Brien was named as the industry expert and our activities were coordinated by the international arbitration commission. If both parties were willing to accept it, the price we determined would be the following year's Market Price, avoiding the costs of arbitration.

Using the confidential information provided, along with other information uncovered through online research and other sources, we were able to establish the price which, in our opinion, best fit the Market Price definition, and a report was submitted to the commission. The parties used our report in a decision on how to resolve the matter.

Charles G. Kemp

Vice President

Petroleum Refining
Commercial Contracts / Markets & Strategy / Litigation / Arbitration / Product Quality / Pricing
North America