Teesside Gas Transportation Ltd v Cats North Sea Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Newey,Lord Justice Males,Sir Geoffrey Vos |
| Judgment Date | 07 April 2020 |
| Neutral Citation | [2020] EWCA Civ 503 |
| Date | 07 April 2020 |
| Docket Number | Case No: A4/2019/1379 & A4/2019/1380 |
| Court | Court of Appeal (Civil Division) |
[2020] EWCA Civ 503
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Mr Justice Butcher
Royal Courts of Justice
Strand, London, WC2A 2LL
Sir Geoffrey Vos, CHANCELLOR OF THE HIGH COURT
Lord Justice Newey
and
Lord Justice Males
Case No: A4/2019/1379 & A4/2019/1380
Mr Bankim Thanki QC & Mr Nik Yeo (instructed by Boies Schiller Flexner (UK) LLP) for the Appellant
Mr Tim Lord QC & Mr Richard Eschwege (instructed by Pinsent Masons LLP) for the Respondents
Remote Hearing dates: 24 th & 25 th March 2020
Approved Judgment
Introduction
This is an appeal from the judgment of Butcher J dated 14 th May 2019 by which he determined various issues concerning the amount payable by the appellant (“TGTL”) to the respondents (“the CATS Parties”) for the right to use part of the capacity of a pipeline for the transportation of North Sea gas. The pipeline ran from an offshore riser platform (“the platform”) located some 230 km east of Aberdeen to an onshore redelivery terminal and gas processing plant (“the terminal”) at Seal Sands, Teesside. It transported gas, not only for TGTL, but also for other shippers who concluded contracts with the CATS Parties.
Only one of the issues decided by the judge is live on this appeal, namely the interpretation of a phrase in the definition of “CATS Capacity”, which formed part of the formula agreed by the parties for determining the “Capacity Fee” payable by TGTL in the Contract Years 2013 to 2018.
The phrase in question is:
“the aggregate maximum rates of delivery of Non-Capacity Gas notified by the CATS Operator pursuant to Clause 4.6(a)(vii), subject to any changes notified pursuant to Clause 4.6(b)(i).”
Clause 4.6(a)(vii) required notification to TGTL, for each shipper other than TGTL, of:
“the maximum rate of delivery of Non-Capacity Gas at such point during the proposed period of transportation.”
The issue is whether, for the purpose of the Capacity Fee formula, the relevant figure for each third party shipper, was (a) the maximum rate of delivery by that shipper over the whole period covered by its contract with the CATS Parties or (b) a figure (known as the Daily Reserved Capacity Rate, or “DRCR”) agreed from time to time between the CATS Parties and the third party shipper as that shipper's firm booked capacity in the pipeline.
TGTL contends for the former (and higher) figure; the CATS Parties contend (and the judge concluded) that the latter (and lower) figure is correct. We were told that some £37 million turns on this issue.
Background
A full account of the background to this dispute is set out in the judge's judgment. For present purposes the following (slightly simplified) summary will suffice.
The platform is owned and operated by the CATS Parties. A 404 km high-pressure gas pipeline runs from the platform to the terminal. It was constructed in the 1980s and early 1990s and became operational in 1993. It has been one of six principal pipelines delivering North Sea gas to the UK mainland. Gas is delivered to the pipeline from several production fields in the North Sea.
On 10 th September 1990 TGTL and the predecessors of the CATS Parties entered into a “Capacity Reservation and Transportation Agreement” (“the Agreement” or “the CRTA”). This entitled TGTL to a pre-determined capacity of pipeline gas, through the exclusive use of specified points of entry (for gas entering the system) and exit (for redelivery of the gas from the pipeline into the terminal). The capacity reserved to TGTL was referred to as the “Capacity Reservation”. Gas transported as part of the Capacity Reservation was referred to as “Capacity Gas”.
The effect of this was to grant TGTL what was described as “a pipeline within a pipeline”. TGTL's sole business activity was to acquire capacity within the pipeline and to sell that capacity on to a consortium operating a collection of fields downstream of the platform.
The Agreement provided for two different payment regimes. From April 1993 (when the pipeline became operational) until 1 st October 2013, TGTL paid a fixed “Transportation Fee” (which consisted of a high initial tariff from 1993 to 2008, and a considerably reduced tariff from 2008 to 2013). From 1 st October 2013 to 1 st October 2018 (when the Agreement ended), TGTL was to pay a “Capacity Fee” which was to be calculated according to a formula. The Transportation Fee and subsequently the Capacity Fee were payable whether or not TGTL used the capacity reserved to it. Thus the Capacity Fee and the formula for its calculation would only become relevant after the contract had been performed for over 20 years.
Under clause 4.5 of the Agreement, the CATS Parties were free to use or sell all capacity other than TGTL's Capacity Reservation. If they contracted for the sale of capacity to third parties (by way of a “Non-Capacity Gas” contract), the CATS Parties were required by clause 4.6 to provide TGTL with certain information about that contract, including its estimated period of life, the proposed points at which gas would enter and leave the pipeline, and a bona fide estimate of the aggregate quantity and composition of the Non-Capacity Gas in the system. Of particular importance for this appeal, the information to be provided to TGTL included “the maximum rate of delivery of Non-Capacity Gas at such point during the proposed period of transportation”.
On 20 th November 1998, the CATS Parties, TGTL, and a number of third-party shippers entered into a multilateral Transportation Allocation Agreement (“the TAA”). The purpose of this agreement, in broad terms, was to make provision for the allocation of gas to shippers on redelivery. Gas entered the pipeline with varying quality and composition at a number of entry points and was necessarily mingled within the pipeline. Arrangements therefore needed to be established to determine how the commingled gas being redelivered from the pipeline at the terminal should be allocated between the various shippers of which TGTL was only one. The arrangements set out in the TAA replaced allocation principles which, as between TGTL and the CATS Parties, had been contained in Schedule XIII to the Agreement, considered below.
The Capacity Fee formula
The contractual formula for calculating the Capacity Fee payable by TGTL was contained in clause 7.10 of the Agreement and was as follows:
CF = (CRR/CC) (OE + EOE + CE) 1.15
These abbreviations were defined by clause 7.10:
(1) CF was the “Capacity Fee payable for the Contract Year in question”. (A “Contract Year” ran from 6 a.m. on 1st October to 6 am on 1 st October of the following calendar year).
(2) CRR was the amount of gas reserved by TGTL, defined as “an amount equal to the sum of the Capacity Reservation Rates (expressed in Cubic Metres per Day) applicable on each Day of the Contract Year in question …”. The CRR was stated to be 8,334,900 Cubic Metres per Day. TGTL was entitled to reduce the CRR on giving two years' prior notice, but only with effect from 1 st October 2008. Any reduction could not be reversed. In the event the CRR was reduced for the 2017–18 Contract Year to 6,515,000 cubic metres per Day.
(3) CC was “an amount equal to the sum of the CATS Capacities (expressed in Cubic Metres per Day) applicable on each Day of the Contract Year in question”. The term “CATS Capacity” was defined as “the summation of the Capacity Reservation Rate and the aggregate maximum rates of delivery of Non-Capacity Gas notified by the CATS Operator pursuant to Clause 4.6(a)(vii), subject to any changes notified pursuant to Clause 4.6(b)(i)”. Thus, for the purpose of this part of the formula, it is necessary to consider what it is that was required to be notified pursuant to clause 4.6(a)(vii) and what changes had been notified pursuant to clause 4.6(b)(i).
(4) OE was “reasonable Operating Expenditures (expressed in Pounds) incurred by the CATS Parties in connection with the CATS Transportation Facilities in the Contract Year in question”. “Operating Expenditure” was defined as “all direct costs borne or paid by the CATS Parties to maintain and operate the CATS Transportation Facilities”.
(5) EOE was “reasonable Extraordinary Operating Expenditures (expressed in Pounds) incurred by the CATS Parties in connection with the CATS Transportation Facilities in the Contract Year in question”. “Extraordinary Operating Expenditures” were defined as “expenditures of a non-capital non-recurring nature with respect to the operation of the CATS Transportation Facilities”, not including (so far as is relevant) “any costs or expenditures that may arise in respect of matters occurring prior to the date when the Capacity Fee … becomes effective”.
(6) CE was “Capital Expenditures (expressed in Pounds) amortised over their useful life reasonably and necessarily incurred by the CATS Parties after 6 o'clock a.m. on 1 st October 2013 to operate the CATS Transportation Facilities”. “Capital Expenditures” were defined as “all costs and expenditures of a capital nature for the design, purchase, construction, installation, repair or replacement of property, materials, plant and equipment, provided that Capital Expenditures shall not include any Abandonment Costs attributable to such...
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