Adaptation of Long-term Contracts

Abstract

The long duration of contracts is an essential factor for the economic stability of large-scale natural-resources projects. All participants in such projects — sponsors, lenders, the respective governments and others — will normally require that in particular the sale of the production of the project, but also the supply of essential commodities or energy to the project, is secured by contracts covering at least the first five to ten years of operation, if not the total life of the project. The longer the life of a contract, the greater becomes the possibility that basic economic elements that have induced the parties to enter into the contract will change. Such changes may remain within the scope of risk which is or can be accepted by the affected party. In other cases it is possible to adjust the contract automatically by price-escalation clauses and similar mathematical formulae. Such changes may, however, cause obvious hardships and prejudices to a party of the contract or even lead to its insolvency. No seller wishes its buyer to become insolvent if it is known that substitute buyers would only accept worse terms and conditions from the seller’s point of view.