British Gas Trading Ltd v Shell UK Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Males,Lady Justice Andrews,Lord Justice Peter Jackson |
| Judgment Date | 04 December 2020 |
| Neutral Citation | [2020] EWCA Civ 2349 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A4/2019/2349 |
| Date | 04 December 2020 |
[2020] EWCA Civ 2349
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Mr Lionel Persey QC (Sitting as a Deputy High Court Judge)
[2019] EWHC 1735 (Comm)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Peter Jackson
Lord Justice Males
and
Lady Justice Andrews
Case No: A4/2019/2349
Michael Bools QC & Tom Pascoe (instructed by Herbert Smith Freehills LLP) for the Appellant
John McCaughran QC & Joyce Arnold (instructed by Clifford Chance LLP) for the First Respondent
David Wolfson QC & Douglas Paine (instructed by Hogan Lovells International LLP) for the Second Respondent
Hearing dates: 27 th & 28 th October 2020
Approved Judgment
Introduction:
This appeal is concerned with two long term agreements (“the Principal Agreements”) for the sale of gas from the Sole Pit Reservoirs in the North Sea. The agreements, on materially identical terms so far as this appeal is concerned, were between Shell and Esso respectively as the Sellers and British Gas as the Buyer. They require the Sellers to provide and maintain a capacity to deliver Natural Gas from the Reservoirs at a specified rate.
The first issue to be determined concerns the true construction of that obligation: for the purpose of deciding whether the Sellers have maintained the necessary capacity, is it permissible (as the Sellers contend) to take account of gas from other reservoirs which is owed to them by other gas producers in repayment of gas from the Sole Pit Reservoirs which the Sellers previously lent to those other companies to enable them to fulfil their delivery obligations to British Gas? The judge, Mr Lionel Persey QC, sitting as a Deputy High Court Judge, held that it is, and accordingly that the Sellers are not in breach of the capacity obligation. The second issue concerns the assessment of damages for breach of the capacity obligation, which the judge resolved (although strictly it did not arise in view of his conclusion of liability) in British Gas's favour.
British Gas now appeals against the judge's decision on the construction issue. The Sellers cross-appeal on the damages issue.
Overview
The Sole Pit field consists of two reservoirs, the Barque Reservoir and the Clipper Reservoir, defined in the Principal Agreements as “the Reservoirs”, for which the Sellers are the holders of Production Licences. The Principal Agreements, concluded on 22 nd December 1988 and due to run until at least 2025, are contracts for the supply of daily quantities of gas from the Reservoirs. There are contractual provisions which set the daily quantity which British Gas is entitled to nominate for delivery. If the Sellers fail to deliver the full amount properly nominated, then they will be in default and must bear the consequences (for which the agreements provide). The Principal Agreements are “take or pay” agreements, providing for a minimum amount of gas that British Gas must either take delivery of, or pay for, every year.
The quantity of gas which British Gas is required to take is dependent upon the “Total Reservoirs Daily Quantity” or “TRDQ”. The TRDQ will change over the life of the contract, beginning with a “Run-In Period” which was followed by the “Build-Up Period” and then the “Minimum Plateau Period”. Following the end of the Minimum Plateau Period, the Sellers had the right to serve Variation Notices which, unless successfully challenged by British Gas, would bring about a reduction (but never an increase) in the TRDQ.
In fact, however, the gas actually delivered to British Gas under the Principal Agreements does not consist of gas molecules exclusively produced from the Reservoirs. Instead gas produced from a number of different reservoirs (including the Reservoirs) is commingled and processed at the Shell Sub-Terminal at Bacton. Processed gas is then redelivered to the producers on a broadly pro rata basis for delivery to British Gas. Provision for this is made in Article 5 of the Principal Agreements and in an agreement known as “STACA” (“the Shell Bacton Sub-Terminal Allocation Commingling and Attribution Agreement”) dated 30 th September 1997, to which Shell, Esso, British Gas and producers from other reservoirs are parties. Although STACA post-dates the Principal Agreements, those agreements had always expressly contemplated an allocation agreement, and STACA superseded a previous allocation agreement, known as “SPOTS” (“the SPOTS Allocation and Commingling Agreement”) dated 9 th June 1993.
STACA provides also for gas to be lent and borrowed between “User Groups” (the term used to refer to the producers from each of the various participating reservoirs or groups of reservoirs) in certain circumstances. Thus the Sellers, as the Sole Pit User Group, may be (and have been) required to lend gas produced from the Reservoirs (i.e. Sole Pit gas) to producers from other reservoirs, on terms that the gas so lent will be repaid as soon as reasonably practicable.
As a result of the substantial volume of Sole Pit gas which has been lent to other User Groups, there is currently a significant balance of gas which is repayable to the Sellers from other reservoirs. As at 28 th May 2018, the amount of gas owing to them under STACA was 72,811 terajoules (TJ).
British Gas does not complain of any failure by the Sellers to deliver the amounts of gas properly nominated for delivery under the Principal Agreements. Rather its complaint, made because for some years the market price of gas has fallen below the price payable under the Principal Agreements, is that the Sellers are in breach of an obligation to provide and maintain a capacity to deliver Natural Gas from the Reservoirs at a specified rate. British Gas contends that, in order to comply with that obligation in circumstances where the production volumes of the Reservoirs were in decline, the Sellers ought to have taken steps to reduce the daily quantities of gas that British Gas was obliged to nominate for delivery under the Principal Agreements by serving Variation Notices to reduce the TRDQ. It says that, had such reductions occurred, it would instead have bought other gas in the market at a cheaper price.
British Gas's claim rests on three propositions, which were the subject of a trial of preliminary issues. In brief summary, these are:
(1) First, that the Sellers' capacity obligation, contained in clause 6.4(1) of the Principal Agreements, required the Sellers to maintain the capacity to deliver the required contractual quantities from the Sole Pit Reservoirs themselves, taking no account of any gas which was owed to the Sellers in repayment of gas lent to other User Groups under STACA.
(2) Second, that a term was to be implied into the Principal Agreements whereby the Sellers' right to serve (or not to serve) a Variation Notice to reduce the TRDQ had to be exercised honestly and in good faith, and not arbitrarily, capriciously or irrationally.
(3) Third, that damages for breach of the capacity obligation in clause 6.4(1) should be assessed on the basis that, in order to perform it, the Sellers would have served Variation Notices that would have reduced the quantities which British Gas was required to take and pay for under the Principal Agreements.
The judge, agreeing with the Sellers, rejected the first two propositions. As a result, British Gas's claim was dismissed. British Gas sought permission to appeal in respect of both decisions, but received permission only on the first, i.e. the proper construction of clause 6.4(1). As to the third proposition, the judge did not accept the Sellers' argument that British Gas's damages case is bad in law. The Sellers cross-appeal this decision.
The Principal Agreements
The parties' agreements are detailed and complex. It is evident that they are the result of sophisticated and expert legal drafting.
Article 3 of each of the Principal Agreements provides as follows, words in bold being defined terms:
“3.1 The Seller agrees to sell and deliver at the Delivery Point and BG agrees to accept and pay for Natural Gas produced from the Seller's Interest during the Contract Period in such quantities and at such times and in such manner as shall from time to time be established under this Agreement.
3.2 The Seller covenants with BG that throughout the Contract Period it will not (unless so permitted pursuant to Article 5 or clause 6.9(7)) produce from the Reservoirs all or any part of its entitlement to Natural Gas which arises by virtue of its Seller's Interest (nor permit Natural Gas to be produced) otherwise than for the purpose of deliveries to BG under this Agreement.”
The “Seller's Interest” is defined as meaning “all that right title and interest in the production and ownership of Natural Gas from the Reservoirs to which the Seller is entitled by virtue of the Production Licences and the Seller's Agreements (being at the date hereof 50% of the total production and ownership of Natural Gas from the Reservoirs) …”. The “Delivery Point” is the point at which gas is delivered to British Gas after processing at Bacton.
Pausing here, it can be seen that British Gas's obligation to accept and pay for gas is limited to gas produced from the “Seller's Interest”, that is to say gas produced from the Sole Pit Reservoirs. However, the gas has to be delivered at the Delivery Point, by which time it would be commingled...
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