Phillips Petroleum Company UK Ltd v Enron Europe Ltd
| Jurisdiction | England & Wales |
| Judge | Kennedy,Potter L JJ,Sir John Balcombe |
| Judgment Date | 10 October 1996 |
| Court | Court of Appeal (Civil Division) |
| Date | 10 October 1996 |
Court of Appeal.
Kennedy and Potter L JJ and Sir John Balcombe.
Sydney Kentridge QC (instructed by Norton Rose) for the appellant.
Gordon Pollock QC (instructed by Freshfields) for the respondent.
The following cases were referred to in the judgments:
Arbuthnott v Fagan [1995] CLC 1396.
Beer v BowdenWLR [1981] 1 WLR 522.
Charter Reinsurance Co Ltd v Fagan [1996] CLC 977.
Courtney & Fairbairn Ltd v Tolaini Bros LtdWLR [1975] 1 WLR 297.
Didymi Corp v Atlantic Lines & Navigation Co IncUNK [1968] 2 Ll Rep 108.
First Energy v HIBUNK [1993] 2 Ll Rep 194.
Little v Courage Ltd (1995) 70 P & CR 469.
Liverpool City Council v IrwinELR [1977] AC 239.
Mallozzi v CarapelliUNK [1976] 1 Ll Rep 407.
May & Butcher Ltd v RELR [1934] 2 KB 17.
P & O Property Holdings Ltd v Norwich Union (1994) 68 P & CR 261.
Queensland Electricity Generating Board v New Hope Collieries Pty LtdUNK [1989] 1 Ll Rep 205.
R v Paddington and St Marylebone Rent Tribunal, ex parte Bedrock Investments LtdELR [1947] KB 984.
Sudbrook Trading Estates Ltd v EggletonELR [1983] 1 AC 444.
Walford v MilesELR [1992] 2 AC 128.
Contract — Parties to use reasonable endeavours to agree — Whether lack criteria by which process of using reasonable endeavours could be judged meant obligation too uncertain to be enforceable.
This was an expedited appeal from a decision of Colman J whereby he granted a declaration to the plaintiff sellers, who had entered into gas sales agreements (GSAs) with the appellant buyer, that it would be a breach of the GSAs for the buyer to refuse or fail to agree the “commissioning date” for the commencement of deliveries of gas to the buyer because it was in the financial interest of the buyer to defer delivery or for any reason other than one based on the technical or operational practicality of the proposed date.
The GSAs were long term contracts for the sale and purchase of the output of a North Sea gas field. The contracts obliged the sellers and buyer to construct certain facilities which were necessary for the performance of the contracts. Under art. 2.2 the parties agreed to exchange a series of notices setting forth their respective good faith estimates of the dates of completion of their respective facilities, the notices to be delivered within continually narrowing time frames. The parties were to use reasonable endeavours to agree as much in advance as possible but in any case not less than 30 days in advance the date on which the seller would commence deliveries of gas to the buyer (the commissioning date). A “fall-back” date was specified if the parties were unable to agree. The parties were obliged to use reasonable endeavours to coordinate the construction of their facilities and to develop operationally necessary procedures.
The seller contended that each party was under an obligation under the GSA to use its best endeavours to reach agreement on the commissioning date having regard only to criteria of technical and operational practicality. The buyer contended that it was entitled to take its own financial position into account when seeking to agree a commissioning date. It was argued that the lack of objective criteria by which the process of using reasonable endeavours to agree a commissioning date could be judged meant that the obligation was too uncertain to be enforceable.
Held, allowing the appeal (by a majority):
1. (Per Kennedy and Potter L JJ) When the critical words in art. 2.2 were read in their contractual setting, and with regard to the fall-back provision, it was impossible to say that they imposed on the buyer a contractual obligation to disregard the financial effect on him, and indeed everything else other than technical or operational practicality, when deciding how to discharge his obligation to use reasonable endeavours to agree a commissioning date prior to the fall-back date. If the obligation was to be strait-jacketed in that way, that was something which would have been expressly stated, and it would not be appropriate for the court to imply a term not least because it was unnecessary to do so for the purposes of business efficiency.
2. (Per Sir John Balcombe) The judge was right to hold that the various qualified obligations to use reasonable endeavours were directed towards co-ordination of the operational capability of the respective facilities and that an entitlement to withhold agreement for commercial considerations would be inconsistent with that purpose. The agreement provision was ancillary to the process of completion of the physical construction and commissioning of the facilities and as such the commercial interest of either party was an irrelevant and impermissible consideration.
Kennedy LJ:
This is an expedited appeal from the decision of Colman J whereby he granted a declaration in the terms sought by the plaintiffs/respondents in an originating summons dated 29 March 1996.
The three respondents (whom I shall call “the seller”) hold production licences in relation to certain continental shelf blocks in the UK sector of the North Sea known collectively as “J Block”. Each entered into a gas sales agreement with the defendant/appellant (“the buyer”) dated 26 March 1993 and in substantially the same form (“the GSA”), under which the seller sold and the buyer purchased the entire entitlement of each respondent to natural gas extracted from J Block during a period expiring in 2011.
Article 2.2 of the GSA, to which I shall turn in detail shortly, dealt with the sequence and time range in which the seller's facilities would be completed and deliveries of natural gas (“gas”) under the GSA would start. The date for commencement of deliveries of gas to the buyer was referred to as the “commissioning date”, which cl. 2 anticipated would be the subject of agreement between the parties, in default of which 25 September 1996 was nominated as the commissioning date.
The declaration granted by the order of Colman J was in the following terms:
“That it is or would be a breach of art. 2.2,2.4 and 2.6 of the gas sales agreements made between each of the plaintiffs and defendant…for the defendant to refuse or fail to agree a commissioning date (as denned in the gas sales agreement):
(a) because it perceives it to be in its own financial interest to defer the first delivery date…by reason of the market price of gas being lower than the price payable after the first delivery date under the gas sales agreements; or
(b) for any reason other than one which is based entirely upon the technical or operational practicality of the proposed commissioning date.”
The GSA is a complicated contract which deals with a wide-ranging and complex subject-matter. It seeks to regulate the parties” conduct over a number of phases and over the course of some 18 years in relation to what is in effect a co-operative enterprise for the exploitation of the J Block field. It requires the parties to act with a degree of cooperation.
The seller is obliged to construct the facilities necessary to extract the J Block gas and to transport it to a 250-mile long pipeline in the North Sea known as the CATS pipeline through which the gas is to be transported to the mainland. The buyer on the other hand is obliged to construct the necessary facilities to receive the gas at the delivery point on the mainland at Teesside. The seller and buyer are to commission their respective facilities jointly. Once gas is available and commissioning complete, the buyer's obligations are those characterised as “take or pay”, that is to say the buyer is obliged either to take the gas and pay for it, or to postpone delivery but to pay immediately. The seller is obliged to sell its total output exclusively to the buyer until the year 2011, by which time it is anticipated that the J Block reservoirs will largely be depleted.
The GSA contains express provisions dealing with the co-ordination of construction schedules, the commissioning of the facilities and the carrying out of a run-in test to prove the capacity of both facilities prior to the first delivery date, when the normal delivery and take or pay provisions come fully into effect.
Article 2 of the GSA is concerned with the stage leading up to the commencement of gas deliveries. It is directed to the parties” obligations connected with the co-ordination of construction, commissioning and testing of the extraction and delivery facilities prior to the first delivery date.
Article 2 provides as follows:
“Period of Agreement; Commissioning; Run-In
2.1 This Agreement shall come into force on the date on which it is executed and shall continue until the end of the Contract Period unless extended or earlier terminated in accordance with the terms of this Agreement.
2.2 The Seller (together with the Other Sellers) shall notify the Buyer of its good faith estimate of the time range within which the Sellers Facilities will be completed and the Seller will be capable of commencing deliveries of Natural Gas to the Delivery Point in accordance with the following notice periods:
By notice not later than:
Time range not exceeding:
(i) twenty-four (24) months
six (6) months before the start of the time range to be nominated;
(ii) nine (9) months
three (3) months before the start of the time range to be notified;
(iii) four (4) months
one (1) month before the start of the time range to be nominated.
The time range in subparagraph (i) above shall fall within the period commencing on 1 October 1995 and ending on 27 September 1996, and the time ranges in subparagraphs (ii) and (iii) above shall fall within the time ranges previously notified. Promptly following each of such Seller's notices, the Buyer shall notify the Seller of its good faith estimate of the date within the time range specified or earlier upon which construction of the Buyer's...
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