Total Gas Marketing Ltd v Arco British Ltd

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLORD SLYNN OF HADLEY,LORD NOLAN,LORD STEYN,LORD HOPE OF CRAIGHEAD,LORD HUTTON
Judgment Date20 May 1998
Judgment citation (vLex)[1998] UKHL J0520-4

[1998] UKHL J0520-4

HOUSE OF LORDS

Lord Slynn of Hadley

Lord Nolan

Lord Steyn

Lord Hope of Craighead

Lord Hutton

Total Gas Marketing Limited
(Respondents)
and
Arco British Limited

And Others

(Appellants)
LORD SLYNN OF HADLEY

My Lords,

1

The three defendant companies in these proceedings are licensees of the Trent Gas Field ("Trent") in the southern North Sea. The plaintiff company ("Total") buys gas and resells it in the United Kingdom for industrial and domestic purposes. Each of the defendants entered into an identical Letter Agreement with Total dated 15 February 1995. Since the issues between Total and the defendant companies were the same it has been convenient throughout to refer only to the agreement with the first defendant ("ARCO").

2

By the Letter Agreement ARCO and Total agreed to execute a "Fully-Termed Agreement" for the sale by ARCO and the purchase by Total of 50 per cent. of ARCO's interest in the natural gas in Trent. The Fully-Termed Agreement was to be substantially in the form of, and with no material changes to, points 1-14 in the Letter Agreement and the draft of an Agreement attached to it. The latter provided that the Fully-Termed Agreement "shall include the conditions precedent detailed in Clause 2.8 of the Draft Agreement" attached to the Letter.

3

Clause 2 was headed "Duration, Termination and Conditions Precedent" and it included Clause 2.8 which was headed "Approvals, Consents and the Allocation Agreement." That clause provided:

"2.8.1 This Agreement is conditional on:

(i) the Seller securing all relevant approvals from the Secretary of State for Trade and Industry of a development plan for the Reservoir compatible with its obligations under this Agreement.

(ii) the Seller receiving or procuring the receipt of all necessary consents for (a) the construction of the Delivery Facilities (including any modifications to the same required before the First Delivery Date) and; (b) the construction of additional facilities and/or modifications to or at the Delivery Terminal; and

(iii) the Seller becoming party to the Allocation Agreement.

"2.8.2 The Seller shall use its reasonable endeavours to obtain the approvals and consents and become party to the Allocation Agreement referred to in Clause 2.8.1 above by 1st March 1996. In using its reasonable endeavours to become a party to the Allocation Agreement, the Seller shall not be obliged to accept onerous contractual obligations and/or make an unusual or excessive payment (or payments) which (a) all other parties to the Allocation Agreement do not or would not have to accept and/or make; and/or (b) a Reasonable and Prudent Operator would not accept and/or make.

If the approvals and/or consents are not obtained by 1 March 1996, either the Seller or the Buyer may terminate this Agreement at any time thereafter provided that the Seller shall not be entitled to so terminate this Agreement if the Seller has not used reasonable endeavours to obtain any approval and/or consent which has not been obtained by such date."

4

Two important expressions used in this Clause are defined in Clause 1.1. The "Allocation Agreement" means "the Agreement(s) which will provide, inter alia, for the commingling, allocation and attribution of natural gas at the Delivery Terminal;" which was stated to be the Amoco Bacton gas terminal situated at Bacton, Norfolk. Secondly, "First Delivery Date" means "the Day, established in accordance with Clause 2.1, on and from which Natural Gas produced from the Reservoir is first to be delivered to the Buyer in accordance with the terms of this Agreement;"

5

Clause 2.1 gave the Seller, ARCO, the option to fix the First Delivery Date within the period 15 September–15 December 1996 inclusive. The Seller was, however, required to give the Buyer, Total, notice of the following periods, within which the Seller expected the First Delivery Date to fall:

"(a) by 1 March 1996 two months falling within the three month period;

(b) by 1 May 1996 one month falling within the two month period."

6

Thereafter ARCO undertook to give 60 days' notice of its chosen First Delivery Date within the one month period. Provision was made as to what was to happen if each of these notices was not given but the relevant provision for the purposes of the argument in this case is that, if notice of both the two month and the one month periods was not given, the First Delivery Date was to be 15 December 1996.

7

Thus ARCO, with the obligation to use reasonable endeavours to obtain the necessary consents and approvals and to become party to the Allocation Agreement, had the unilateral right to fix the First Delivery Date. It could do that to suit its own arrangements.

8

Apart from these clauses of particular relevance to the present dispute the Letter Agreement and the Draft Agreement contained detailed provisions as to quantities and rate of supply, as to price and payment, as to quality and as to what was to happen on default. It is not necessary to set out these provisions but it is right as the appellant stresses to bear in mind the nature and the matrix of the agreement.

9

The gas reserves in Trent were estimated at the time of the Letter Agreement at 190 billion cubic feet and the life of the field at about 14 years. Developing an off-shore gas field involves massive capital investment on the part of the developer–from exploration, through design, to construction of the wells, the off-shore platforms and pipelines and the modifications needed at the on-shore terminal. The gas having left the field through a branch line to join the main pipeline to the terminal commingles with other gas and has to be processed to meet the necessary specifications before it is delivered by the Seller to the Buyer. For all this investment it is an advantage to the Seller to have a long-term contract, "a life of field depletion contract," for the full exploitation of the field until it is abandoned when it is no longer economically worthwhile to continue and to have agreed annual quantities which the Buyer will take. It is also an advantage to the Buyer who looks for long-term supply enabling the Buyer to plan its own onward contract. From the Buyer's point of view it can be no less important that the daily quantities of gas to be taken may be varied according to his needs and the Draft Agreement allows quantities to be nominated by the Buyer on a daily basis (including a zero nomination) but subject to an obligation to take a minimal annual quantity for which it must pay if it does not take and to an adjustment of price if gas is not delivered on time but made up in later periods. This provides both flexibility and security for the Buyer.

10

But central to the project where, as here, gas is to be delivered to a terminal by a number of users of the facilities is the Allocation Agreement by which the quantities of gas leaving the terminal after necessary processing can be allocated and attributed to each user after allowance has been made for losses during transport and processing.

11

The relevant events following the signing of the Contract can be stated quite shortly. ARCO complied with all the provisions of Clause 2.1. Thus it gave notice on 28 February 1996 of the two month, period fixed at 1 October 1996–30 November 1996. On 29 April 1996 it gave notice of the one month period, fixed at 1 October–31 October 1996 and on 28 August 1996, it gave notice of the First Delivery Date which it fixed at 31 October 1996.

12

ARCO obtained the approvals and consents referred to in Clause 2.8 by 1 March 1996. ARCO did not, however, become a party to the Allocation Agreement by 1 March 1996 but it has not been suggested that it failed to use reasonable endeavours to do so.

13

It is agreed that in February 1995, the time of the contract, when much work had been done, but when much more remained to be done, it was anticipated that the code setting out the rights and responsibilities of users of the off-shore gas transportation system would be introduced in October 1995 but this did not happen until March 1996. By a letter dated 29 March 1996 ARCO, in reply to a question from Total asking for confirmation that ARCO had become a party to the Allocation Agreement, said that AMOCO was responsible for drafting the Allocation Agreement and that ARCO was using reasonable endeavours to expedite the signing. During the summer discussions took place about the Fully-Termed Agreement and on one draft of that agreement, prepared for a meeting in September, Total wrote: "Given the proximity of the FDD, please advise on the status of the Allocation Agreement." In September ARCO proposed a later start-up date but Total did not accept this.

14

Prior to the First Delivery Date, fixed by ARCO, Total nominated daily quantities of gas for delivery from that date but on 30 October 1996 ARCO advised Total that:

"It is possible that the agreements governing allocation of Trent … gas at the AMOCO Bacton Terminal will not be signed on 30 October in which eventuality the Seller would be unable to deliver gas from Trent to Total until such time as the Agreements are signed."

15

It was, however, said on the same day and again on 31 October that it was anticipated that, following agreement of the Bacton Plant Owners and User Field Group, amendments to the existing RDAA Allocation Agreement would be executed and the revised system of software be approved and operational so that gas could flow even though ARCO had not become a party to the Allocation Agreement. It is not suggested that these arrangements constituted ARCO becoming a party to the Allocation Agreement.

16

On 5 November 1996 Total wrote:

"We note … that the Allocation Agreement is not in place. Without prejudice to the consequences of this fact, we require details of the approval which you have...

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