Scottish Power UK Plc v BP Exploration Operating Company Ltd & Ors, Court of Appeal - Commercial Court, September 25, 2015, [2015] EWHC 2658 (Comm)

Resolution Date:September 25, 2015
Issuing Organization:Commercial Court
Actores:Scottish Power UK Plc v BP Exploration Operating Company Ltd & Ors
 
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Case No: 2013 FOLIO 305

Neutral Citation Number: [2015] EWHC 2658 (Comm)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 25 September 2015

Before :

MR JUSTICE LEGGATT

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Between :

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John McCaughran QC and Laurence Emmett (instructed by Berwin Leighton Paisner LLP) for the Claimant

Helen Davies QC and Richard Eschwege (instructed by Herbert Smith Freehills LLP) for the Defendants

Hearing dates: 30 June, 1-2 July, 8-9 July 2015

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JudgmentMr Justice Leggatt:

Introduction

  1. The claimant in this case (``Scottish Power'') is a party to four long term Agreements for the Sale and Purchase of Natural Gas under which, as ``Buyer'', it has agreed to purchase from the ``Sellers'' natural gas produced from the Andrew Field, an oil and gas field lying some 230 km north east of Aberdeen in the North Sea. There is a separate Agreement between Scottish Power and each Seller in materially identical terms. The Sellers are the companies which own the rights to produce hydrocarbons from the Andrew Field. The Agreements were originally made in 1994 but have been novated from time to time as the original Sellers have transferred their interests to new parties. The four defendants in this action were the Sellers at all material times until 10 January 2014. I will refer to them as the ``Andrew owners''. Their interests in the Andrew Field were in the following shares: the first defendant (``BP'') - 62.75%; the second defendant (``Talisman'') - 9.86%; the third defendant (``Eni'') - 16.21%; and the fourth defendant (``JX Nippon'') - 11.18%. On 10 January 2014 Eni transferred its interest to JX Nippon, which now therefore has a share of 27.39% in the Andrew Field.

  2. For over 3½ years from 9 May 2011 until 26 December 2014, the production of natural gas from the Andrew Field was shut down. The main reason for this was so that work could be done to ``tie in'' the Andrew Field with a nearby oil and gas field known as the Kinnoull Field. This involved modifying the platform and facilities used to handle oil and gas produced from the Andrew Field so that they could also be used to handle oil and gas produced from the Kinnoull Field.

  3. The dispute in this action is about the contractual consequences of the shutdown. It is now accepted by the Andrew owners that, at least for much of the relevant period, the failure to deliver gas to Scottish Power amounted to a breach of the Agreements. But it is their case that the consequences of such non-delivery are exclusively provided for by the Agreements themselves, which contain a compensation mechanism involving the supply of gas at a reduced price after deliveries resume (referred to as ``Default Gas''). It is Scottish Power's case that its remedies for breach of contract are not limited to the receipt of Default Gas and that it is entitled to recover damages under the general law measured as the additional cost to Scottish Power of buying replacement gas from elsewhere during the period of the shutdown.

  4. The resolution of this central issue depends on the interpretation of certain clauses of the relevant Agreements. At the time when the parties sought directions at a restored case management conference on 5 December 2014, the case had been fixed for a trial of all issues of liability with a time estimate of 5-7 weeks. It seemed to me on that occasion that it would be much more efficient to decide, in the first place, the key questions of interpretation in dispute. Depending on the conclusions reached, there should then either be no need for any further trial or its scope would be substantially narrowed. Following discussions between the parties and a further hearing, I gave directions on 29 January 2015 for the trial of five preliminary issues.

  5. Before identifying and addressing these issues, I will first outline the general scheme of the Agreements, the approach to be adopted in interpreting the Agreements and further relevant background to the dispute.

    The Agreements

  6. For material purposes, the terms of the Agreements are identical save for the size of each Seller's interest in the production and ownership of natural gas from the Andrew Field. The Agreements are complex and the following is intended only as a broad overview of their terms. I will focus in more detail later on the particular provisions which are the subject of the preliminary issues.

  7. Article 1 of each Agreement contains definitions of more than a hundred words and expressions. For the most part, I will follow in this judgment the practice adopted in the Agreements of signifying by the use of initial capital letters that a word or expression is a defined term. Two defined terms relevant in this case for which, exceptionally, initial capital letters are not used in the Agreements are ``properly nominated'' and ``underdelivery'' (and cognate words).

  8. Pursuant to Article 2.1(1), the Contract Period commenced on the date when the Agreements were made - which was 4 February 1994. At that time, however, neither the Sellers nor Scottish Power had completed construction of the facilities needed for the production, delivery and receipt of natural gas. Pursuant to Article 2.7(1), the first Contract Year commenced on the Commencement Date, which in the event was 1 October 1996. Some early deliveries had been made in the summer of 1996 but the Commencement Date was the date when the full contractual regime for the delivery of natural gas under the Agreements began.

  9. It is apparent from the provisions dealing with duration and termination in Article 2 that the Agreements are intended to continue for as long as it is economic for the Sellers to produce gas from the Andrew Field. The main termination rights provided in Article 2 are:

    i) a right of either party to terminate the Agreement on 24 months' notice expiring not before the 25th anniversary of the Commencement Date - Article 2.1(1)(a);

    ii) a right of either party to terminate the Agreement on notice if the Seller has tendered no natural gas for delivery for 90 days due to permanent cessation of production from the Andrew Field - Article 2.1(1)(b); and

    iii) a right of the Seller at any time after the fourth Contract Year to terminate the Agreement if the Sellers reasonably expect that over a period of one Contract Year Production Costs will exceed Revenue - Article 2.2(1).

  10. The basic agreement for the sale and purchase of gas produced from the Andrew Field is contained in Article 3.1:

    ``Subject to the reservations contained in Clause 5.1 the Seller agrees to sell, tender for delivery and deliver at the Delivery Point and the Buyer agrees to accept and pay for, or if not accepted to pay for (pursuant to Articles 9 and 10), all Natural Gas tendered for delivery by the Seller and produced from the Seller's Interest in the Andrew Field and/or produced by the Seller for delivery to the Buyer by virtue of the rights contained in Clause 5.2 during the Contract Period. The quantities, prices, times and manner in which such Natural Gas shall be sold, tendered for delivery, accepted and/or paid for shall be established under this Agreement.''

  11. Article 4 contains various warranties and indemnities, and includes in Article 4.6 an exclusion of liability for certain types of loss. The Andrew owners rely on this clause as allegedly excluding liability for Scottish Power's claim for damages in this action.

  12. Article 5 is headed ``Seller's Reservations''. The rights there reserved to the Seller include:

    i) ``without prejudice to its obligations to deliver the quantities of Natural Gas properly nominated by the Buyer under Article 6 through facilities provided, installed, repaired, replaced, maintained and operated under Article 7, the right to decide the manner in which it conducts its operations'' - Article 5.1(1); and

    ii) the right to have natural gas delivered into the Seller's Facilities from any field, reservoir or source which is not part of the Andrew Field for processing in and transportation through the Seller's Facilities - Article 5.2.

  13. Article 6 contains detailed provisions establishing the quantities of natural gas to be sold and purchased under the Agreements. The starting point of this regime is to establish for each Contract Year a daily rate by reference to which the Buyer is to nominate quantities of gas for delivery. This daily rate is referred to as the ``TDCQ'' (an abbreviation for the ``total daily contract quantity''). The TDCQ varies according to the stage that has been reached in the life of the Andrew Field. The relevant events in this case occurred during the Plateau Period of production. During this period the TDCQ is 8,269.29 Megawatt hours (MWh). From the TDCQ, there are also arithmetically derived a daily contract quantity (``DCQ'') and an annual contract quantity (``ACQ'') for each Seller.

  14. Article 6.11 requires the Sellers to maintain a capacity to deliver natural gas from the Andrew Field to the Buyer on each day at a rate which is 130% of the TDCQ (subject to a right on the part of a Seller to reduce this capacity if and when deliveries made in a Contract Year exceed 115% of the Seller's ACQ). This Delivery Capacity represents the maximum quantity of gas which the Buyer may nominate for delivery on any day. Article 6.12 contains the obligation of the Seller, subject to the provisions of Article 5, to ``deliver on each Day at the Delivery Point the quantity of Natural Gas properly nominated by the Buyer under the Agreements for delivery on such Day''. Article 6.13 sets out the procedure for nominating quantities of gas for delivery. The basic requirement is for the Buyer to give notice to the Seller (by 10am on the Friday of each week) of the amount of natural gas required to be delivered on each day of the following...

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