Let's renegotiate Phoolbari

However, any legal and contractual arrangement with international mineral company for exploration and development of coal should be transparent, equitable in terms of sharing economic benefits between host state and company from the project and competitive in terms of fiscal regime of contract in view of global scenario of comparable arrangements. In fact, an equitable fiscal regime in which respective 'government take' and 'company take' is allocated on the basis of risks and exploration costs is central to any contractual arrangement of mineral development.

Recently, it has been revealed from the various media reports and statements of energy advisor of government that fiscal regime of Phoolbari coal project is inequitable and heavily imbalanced against Bangladesh as the rate of royalty stipulated in the contract is far below the international standard in view of prevailing fiscal terms and conditions in similar arrangements of other mineral producing countries. It appears that royalty is one of the main fiscal mechanisms under the phoolbari coal project through which economic rent for Bangladesh is determined. It is also revealed from media reports that contract was concluded in non-transparent process. As such, fairness in the contractual arrangement has been challenged by various quarters and consequently, its renegotiation has been demanded to rectify unfairness in economic terms and conditions of contract in order to ensure protenction of national interest. This write up highlights the justifiability of renegotiation of mineral agreements in general and Phoolbari coal project in particular.

At the outset, it should be recognised that the renegotiation and adjustment of petroleum and mineral contracts is an accepted practice in the natural resources industry. The underlying rationale of renegotiation of such contracts usually revolves around the necessity of ensuring equity and fairness in contractual arrangements so that legitimate interests of both parties are protected. Renegotiation of mineral agreements can occur for various reasons during the life-time of the mineral contracts which are usually of long duration.

Firstly, the perception of initial unfairness and unconscionability of the contract terms which may be caused due to lack of information and the weak bargaining position of one of the parties, may prompt the weaker party to demand the revision of the contract at the later phase of contract performance. This initial unfairness can cover inequitable fiscal arrangement such as the projected "government take" or "company take" under the contract in question imbalanced against one of the parties to the contract.

Secondly, it is not unusual that changes of circumstances may occur during the life of the mineral contract that alter materially the parties' expectations with respect to the outcome and the desirability of the continuation of the contract. In the circumstances of change, in most cases, the intention of the parties and the commercial and economic rationality suggests that contract should be adjusted by renegotiation, revision or modification of its terms and conditions in order to continue the contractual relationship rather than its abrupt end.

Thirdly, long-term contracts like mineral agreements can never be perfectly drafted because the parties' ability to predict all the events that may affect the contract in future is limited. The fact that mineral and petroleum contracts are negotiated under conditions of considerable complexity and uncertainty means that it is not possible for the parties to specify in advance every conceivable contingency in the contract.

Moreover, the transaction costs of negotiating every possible future change and ex-ante specification of contract details may be too high to discourage the parties to narrate the future contingencies in detail and how to mitigate them. Thus, these kinds of contracts are bound to be incomplete in specification of detailed terms of some of its aspects, which necessitates renegotiation or adaptation of the contracts in future.

Finally, renegotiation of mineral agreements can also be triggered by a comparative scenario of better terms and conditions in areas such as fiscal arrangements, price structure, methods of production, and marketing and development of the production area in similar agreements. Thus, the host government may request a renegotiation of contract if there are substantially better fiscal terms in favour of other host states in similar kind of agreements. In renegotiating the contract in such circumstances, parties look at the terms of parallel or more recent agreements, tax or investment legislation of other countries so that it can be internationally competitive and fair to both parties.

However, renegotiation of a mineral contract is not a unilateral process and it may be asked by the companies prompted by the consideration of the economic viability of continuation of the project in its original form. On many occasions, renegotiation can create more favourable conditions and terms for the companies. In many cases, a renegotiation may be invoked by both parties for achieving their mutually reinforcing economic interest of the project, for preserving good future relationship and maintaining their reputation in the global marketplace. Thus, renegotiation is essentially a consensual process of change in the terms and conditions of the contract in order to redefine the rights and obligations of the parties under the contract.

The renegotiation can take place either by way of process prescribed by the provisions of the contract or extra-contractual procedures, since contracts do not always prescribe the procedures to renegotiate or revise the contract. The scope of renegotiation of mineral agreements may vary widely depending upon the circumstances of each case and the nature of disagreement among the parties on the issues involved. It may be so broad as to cover the revision of whole contract or may be narrow, requiring changes of only a specific provision or provisions of the contract.

Indeed, in modern mineral contracts, provisions for renegotiation or a revision have become commonplace and it is increasingly realised that these clauses can facilitate orderly change in the contract. Even in the absence of an express provision for renegotiation or revision of contract, international mineral industry practice dictates implied obligation on the part of the parties to renegotiate the contract if such renegotiation becomes inevitable for reasons mentioned above. Given the long-term nature of the contract and considering the economic rationality of the continuation of the contractual relationship, it seems logical that the parties should undertake renegotiation as an implied obligation.

However, fairness and good faith should always be the basic criteria of renegotiation or revision of the mineral contracts. Renegotiation should be based on mutual cooperation and trust. The goal of equity and fairness in the contractual outcome is the primordial issue of contract revision and adaptation. In the case of a contract which is perceived to be an inequitable arrangement from the very beginning or becomes an exploitative one subsequently, the renegotiation of such a contract on the basis of mutual understanding can bring fairness and equity in the contractual outcome.

From the above, it is discernible that Phoolbari coal project needs renegotiation for deriving equitable economic benefits for Bangladesh if fiscal regime is unreasonably favourable to the company and deprives Bangladesh of its legitimate economic interests from the exploration of its natural resources. This may be argued from the perspective of initial unfairness of contract caused by the rate of royalty and other economic terms and conditions under the contract, which is not fair judged by the parameters of existing international standards. Such renegotiation is essential not only for equitable adjustment in the fiscal regime of contracts as demanded by Bangladesh, but also for reducing the scope of future discontent which may ultimately pose threat to stability of the contract.

Dr. Abdullah Al Faruque is Assistant Professor, Department of Law, University of Chittagong.