A long-term supply-and-purchase agreement for liquified natural gas (LNG) delivered at a liquefaction plant in the Pacific Basin contained a profit-sharing mechanism for cargo diversions to higher-price markets. Following a disagreement over the correct interpretation of this mechanism, the seller initiated an arbitration claiming damages in excess of 400 million euro.

On behalf of the LNG buyer, NERA showed that, under its contractual interpretation, the buyer had incentives to ship the LNG to the highest-value market, thereby maximizing the overall surplus to be divided between buyer and seller. Under the contractual interpretation of the seller, the buyer would at times gain more by diverting the cargo, even though such diversion would reduce the total overall surplus, an outcome unlikely to be intended by the commercial agreement.

Following the submission of our expert report, the client reached a manifestly satisfying commercial settlement.