Case Studies details
The Case of the Disappearing Price Postings
Arbitration, North America
January 1, 2016
Two large energy companies entered into a long-term agreement for the sale and purchase of liquefied petroleum gas (LPG). The agreement stipulated that the buyer would purchase LPG from the seller based on the average of three price “postings” that were considered by both parties to be relevant market reference points at the time the contract was consummated. It was further agreed that if one or more of the posted prices were ever discontinued, the parties would agree on a replacement pricing source reflective of the same fair market value.
During the initial years of the agreement, the contract functioned largely as anticipated. However, several years further into the contract, two of the initial posting references were abruptly discontinued. However, instead of entering into discussions to replace the discontinued postings, the seller invoiced—and the purchaser paid—for the LPG based solely on the one remaining posted price. Sometime later, the third and last posting was discontinued. When this occurred, one of the parties filed for arbitration, claiming that during the period when there was only one posting, it was not truly reflective of fair market value. The claimant sought a price adjustment from the respondent for all periods when only one price posting was available, as well as viable contract price references going forward.
Baker & O’Brien was engaged to examine the market of interest and suggest suitable replacement postings, indices, or other price quotations that would provide a fair market value comparable to that which the parties had originally agreed. Upon investigation, we found that many structural changes had occurred in the market—new entrants, changes in asset ownership, and fundamental changes in the LPG supply/demand balance. These market changes directly or indirectly impacted the availability of posted prices in the market. Our consultants compiled historical pricing data from various sources, including company postings and independent assessments from pricing publications. Using these data, we studied trends and relationships between the three original contract-stipulated postings and other available price sources that might make suitable replacements. We submitted an expert report to the arbitral panel that characterized the fundamentals of the market and its dynamic nature, and offered recommendations for the best price references for use in the future. The parties reached agreement prior to the arbitration convening.