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House of Lords
Session 1997-98
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Judgments - Total Gas Marketing Limited v. ARCO British Limited and Others


  |Lord Slynn of Hadley   Lord Nolan   Lord Steyn   Lord Hope of Craighead   Lord Hutton





ON 20 MAY 1998


My Lords,

      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").

      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.

      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."

      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;"

      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."

      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.

      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.

      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.

      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.

      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.

      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.

      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.

      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.

      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."

      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.

      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 secured from the AMOCO Bacton Terminal Owners and an explanation as to why, if this is indeed the case, properly nominated quantities of Trent gas are not yet being delivered to TGM."

      On 6 November ARCO wrote to say that the Allocation Agreement had been executed by all relevant parties on that day. ARCO explained that the Allocation Agreement originally planned had been replaced by alternative agreements under the provision of the existing allocation agreements at the Bacton terminal. "These agreements together with the off-shore sub-allocation and attribution agreement comprise the 'Allocation Agreement' for the purposes of the Fully-Termed Agreement."

      By Clause 8 of the Draft Agreement the price agreed was 17.75p per therm subject to adjustment. By the time of the First Delivery Date and subsequently the market price was substantially less so that obviously it was from that standpoint in ARCO's interest to maintain the agreement and in Total's to be free to buy in the market. Nevertheless gas began to flow on 7 November and has continued to be supplied. The parties are in dispute as to whether the agreements made by ARCO constituted the Allocation and Attribution Agreement required by the Letter Agreement and the Draft Agreement and as to the legal basis upon which Total has taken these deliveries but neither of these matters falls to be considered in the present proceedings.

      Total, however, issued a writ on 10 January 1997 claiming a declaration that it was not bound by the terms agreed in the Letter Agreement. In the Statement of Claim this was put on the basis that the condition precedent (entering into the Allocation Agreement) not having been satisfied by the First Delivery Date the rights and obligations of the parties under the Letter Agreement "have terminated and/or have ceased to apply." The defence delivered was, first, that the agreement did not provide any specific date by which the Allocation Agreement had to be entered into nor did it give any right to terminate the Letter Agreement if the Allocation Agreement was not entered into by any fixed date. The alternative defence was that, if either 1 March or 31 October 1996 were fixed dates for entry by ARCO into the Allocation Agreement, Total had waived any right to rely on ARCO's failure to do so. Before Jonathan Parker J. the alleged waiver defence was abandoned. The sole issue was simply expressed--did the non-fulfilment of the condition that ARCO enter into the Allocation Agreement, which was admitted, mean that on 31 October 1996 the Agreement terminated or that further performance of the Agreement was merely suspended and if so for how long.

      The learned judge refused Total's claim and dismissed the action. In his view to describe the obtaining of an allocation agreement as a condition precedent could only mean a condition precedent to further performance or subsistence of the sale agreement. It was not a condition precedent to the coming into being of a contract. The clause was still to be seen as a condition precedent if the result was that "it relieves one or both parties from liability for breach of contract so long as the condition remains unfulfilled, but on the footing that once the condition is fulfilled the contract will continue in full effect." If it had been intended that the contract would automatically terminate the draftsman, thought the judge, would have said so expressly. In his view the First Delivery Date had to be read as the target date since delay in starting the period would not shorten the period for delivery.

      Moreover if performance were suspended Total retained a right to terminate under Clause 2.7.2 of the Draft Agreement in the event that no Allocation Agreement was in place by the end of the ensuing 12 months, but, in the meantime, the suspensory condition would operate to relieve ARCO wholly or partly of liability for a breach of its delivery obligations. To read the condition as meaning that the Agreement automatically terminated if the Allocation Agreement was not in place on the First Delivery Date introduced uncertainty, was not expressly provided for, as it would have been if the parties so intended and made no commercial sense. A failure to enter into the Allocation Agreement as a result of which deliveries could not be made fell within Clause 2.7.2 so that Total could not terminate the contract until there had been a failure to deliver for 12 months. "Clause 2.7.2 is highly material to the construction of Clause 2.8" since in that clause the parties have "allowed for substantial slippage in the progress of the project". That is "inherently inconsistent" with Total's claim as to automatic termination on the First Delivery Date.

      The Court of Appeal, (Nourse L.J. dissenting, Peter Gibson L.J., Otton L.J.) discharged the judge's order and declared that Total was not bound by the terms in the Letter Agreement and Draft Agreement attached to it.

      Peter Gibson L.J. held that the condition in Clause 2.8.1(iii) was not a promissory condition, the breach of which by one party allowed the other party to treat the contract as terminated. It was, however, still a matter of fundamental importance to the contract and to be treated as a "contingent condition" or "a condition precedent." These constitute "states of affairs which, if they do not exist at a designated time, either automatically bring the contract to an end or suspend the obligations thereunder." Peter Gibson L.J. rejected the contention that the First Delivery Date was a mere target date. It was of crucial importance in the scheme of the agreement. There was no provision in the agreement as to the fixing of a new delivery date or as to the suspension of obligations during the period after the First Delivery Date had passed if no Allocation Agreement had been entered into. The resulting uncertainty for an unknown period left the Buyer wholly without remedy. There was no reason to prefer 15 December 1996 over the date chosen by ARCO itself. He rejected the argument that non-compliance with the condition resulted in suspension of the agreement. In his view it produced a termination of the agreement and none of the authorities cited on behalf of ARCO compelled a different conclusion. Per contra the cases cited on behalf of Total "show that the non-fulfilment of the condition precedent when no time is fixed for the performance of the condition but the latest time for that performance has expired can cause a contract for sale to terminate, if it ever came into existence." Otton L.J. delivered a judgment substantially agreeing with Peter Gibson L.J.

      Nourse L.J. did not consider that the condition in Clause 2.8.1(iii) of the Draft Agreement was properly described as a condition precedent. "Whilst the description emphasises the effect of the provision, it tells us nothing of the time by which the specified event is to occur." He concluded that judged objectively it could not have been the intention of the parties that if "ARCO should not become a party to the Allocation Agreement on or before the First Delivery Date the sale agreement should thereupon determine." Having analysed the facts adverted to by counsel on both sides he concluded:

     "That means that this is a case where the contract fixes no time for the fulfilment of the condition, so that it must be fulfilled within a reasonable time, the reasonableness of the time being determined objectively as at the date of the contract; as to the last point, see in Re Longlands Farm [1968] 3 All E.R. 552, 556B-C per Cross J.".

      He continued:

     "I would therefore hold a reasonable time to have been such a period after the first delivery date as was reasonably required for it to be ascertained whether the allocation agreement would be concluded or not. I do not attempt to put a precise term on that period."

      It had, however, not expired by the time ARCO did on 7 September 1996, subject to Total's outstanding contentions, become a party to the Allocation Agreement.

      On this appeal the issue before Your Lordships was agreed by the parties to be as follows:

     "Whether a condition to which a contract for the sale and purchase of North Sea Gas was expressed to be subject, but for whose fulfilment no time was fixed, had necessarily to be fulfilled before the date fixed for the first delivery of gas so that the agreement automatically terminated if not fulfilled."

      Both sides accept that a time will come when, if the Allocation Agreement is not entered into by ARCO, the Letter Agreement will terminate. No-one suggests 1 March 1996 since ARCO's obligation up to that stage was not to enter into an Allocation Agreement by that date but to use reasonable endeavours to do so. Four possibilities remain--(a) the First Delivery Date contended for by Total, 31 October 1996; (b) the last day of the period within which the First Delivery Date had to be fixed by ARCO, i.e. 15 December 1996 (ARCO's second choice); (c) such a period after the First Delivery Date as was reasonably required for it to be ascertained whether the Allocation Agreement would be concluded or not, which could be earlier or later than 15 December 1996 as accepted by Nourse L.J. (ARCO's third choice); or (d) a reasonable period being not less than 12 months from the First Delivery Date i.e. not before 31 October 1998 and perhaps considerably later dependent on whether the commercial purpose of the contract could be seen to be frustrated (ARCO's first choice).

      Which if any of these is to be taken must depend on the construction of the express words of, or the recognition of an implied term in, the Letter Agreement, bearing in mind, as the appellants stress, this being a commercial contract, the desirability of upholding rather than defeating the purpose of the contract between the parties.

      The starting point for resolving this question is the provision in the Letter Agreement that the Fully-Termed Agreement "shall include the condition precedent detailed in Clause 2.8 of the Draft Agreement" and the provision in Clause 2.8.1 that "This Agreement is conditional on: . . . (ii) the Seller becoming party to the Allocation Agreement." Since by Clause 1.2(c) "All headings in this Agreement are used for convenience only and shall not affect the construction or validity of this Agreement;" I leave aside the heading to Clause 2 "Duration Termination and Conditions Precedent."

      It is clear that the word condition may be used in a number of different senses. As Lord Reid said in Wickman Machine Tool Sales Ltd. v. L. Schuler A.G. [1974] A.C. 235, 250H:

     "In the ordinary use of the English language 'condition' has many meanings, some of which have nothing to do with agreements. In connection with an agreement it may mean a pre-condition: something which must happen or be done before the agreement can take effect. Or it may mean some state of affairs which must continue to exist if the agreement is to remain in force. The legal meaning on which Schuler relies is, I think, one which would not occur to a layman; a condition in that sense is not something which has an automatic effect. It is a term the breach of which by one party gives to the other an option either to terminate the contract or to let the contract proceed and, if he so desires, sue for damages for the breach."