Judgments - Amoco (UK) Exploration Company etc. and Others v. Teesside Gas Transportation Ltd and v. Imperial Chemical Industries Plc and others (Consolidated Appeals)

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    34. These conclusions, differing from those of the Court of Appeal, make it necessary for me to consider Mr Sumption's alternative argument based on clause 7.5 which the Court of Appeal found it unnecessary to address.

    35. Clause 7.4, as I have said, deals with the obligation to make send-or-pay payments. There is a formula for calculating the amount of the payment in which one factor is C-S. C is, roughly speaking, the total reserved capacity expressed as the number of cubic metres available on each day in the relevant quarter and S is the aggregate quantity of gas actually delivered over the same period, for which payment is made according to a different formula. So C-S represents capacity reserved but unused. Clause 7.5 provides for a reduction in C if the reserved capacity is "not available (as determined pursuant to Clause 7.5(b)) for the provision of the Transportation Service". Clause 7.5(b) therefore contains an exhaustive definition of what is meant by not being available for the purposes of clause 7.5(a) and, as I have said, it covers some three pages. I cite a few of its provisions:

    "(I) Capacity shall be deemed not to be available for the provision of the Transportation Service when (and to the extent that) the CATS Parties are unable or fail to redeliver Capacity Redelivery Gas at the relevant Redelivery Point for whatever reason, including without limitation:

    (A) periods of maintenance of the CATS System;

    (B) Force majeure affecting the CATS Parties, the CATS Operator, the CATS Transportation Facilities or the operation thereof;

    (C) the failure of the CATS parties or the CATS Operator to accept at any relevant entry point Capacity Gas at the relevant Capacity Input Rate and at the relevant Notified Specification…

    unless such inability or failure of the CATS Parties is due to any of the following:

    (E) an act or omission of [TGTL]…

    (G) failure of [TGTL] … to deliver Capacity Gas to any Entry Point at the relevant Capacity Input Rate and at the relevant Notified Specification for any reason…but excluding any such failure caused by an act or omission of the CATS Operator or any of the CATS Parties."

    36. Mr Sumption said that during the period from the Commencement Date until the problems with the T6 valves had been sorted out, the CATS Parties were "unable…to redeliver" TGTL's gas to the extent of the whole of the capacity to which it was entitled. Factor C should therefore be reduced to zero and it follows that the send-or-pay payments should also have been reduced to zero.

    37. It appeared in the course of the argument that the provisions of clause 7.5(b) might give rise to some tricky questions of causation. Mr Pollock said that for the CATS Parties to be unable or fail to "redeliver Capacity Redelivery Gas", there must have been some gas delivered. It could not apply when TGTL had no gas to offer. Mr Sumption said that, in that case, why did (G) create a specific exception for the case in which the failure to redeliver was because TGTL had not delivered any and then excluded from that exception a failure to deliver "caused by an act or omission of the CATS Operator or any of the CATS Parties"? That meant that if the reason why TGTL was not delivering any gas was because the pipeline was shut (e.g. for maintenance under (A)) it was still entitled to its reduction.

    38. Mr Sumption may well be right in these submissions but I do not think that I need to deal with them because in my opinion it is clear that capacity cannot be said to be "not available . . . for the provision of the Transportation Service" at a time when the CATS Parties have no obligation to provide the Transportation Service. I have quoted the definition of the Transportation Service in clause 6.1 and it is an obligation to accept, transport and redeliver gas "subject to the other terms and conditions of this Agreement". One of the other terms is clause 5.14, which provides that "the Transportation Service for a Designated field shall not commence" until certain conditions have been satisfied. The first of these is that TGTL's facilities to bring the gas from (in this case) the J-Block fields shall have been "constructed, installed, tied-in, certified, tested and commissioned". It follows that for the entire period during which TGTL say that capacity was "not available…for the provision of the Transportation Service" within the meaning of clause 7.5(a), it was not entitled to the provision of the Transportation Service. It was therefore not entitled to a reduction in send-or-pay payments.

    39. It follows that TGTL has been liable for the send-or-pay payments since 1 April 1993 and ICI and Enron are liable as guarantors. For these reasons and those of my noble and learned friend Lord Hope of Craighead, I would allow both appeals with costs here and in the Court of Appeal and restore the orders of Langley J.

LORD HOPE OF CRAIGHEAD

My Lords,

    40. The Capacity Reservation and Transportation Agreement (CRTA) with which these appeals are concerned identified the commercial context in which it was entered into by means of a brief preamble in which the following recitals are set out:

    "(A) The CATS Parties intend to construct, own and operate the CATS System.

    (B) The ICI/Enron Party wishes to reserve capacity in the CATS Transportation Facilities and to procure certain transportation services and the Parties wish to provide herein for such reservation of capacity and the terms upon which such transportation services shall be provided by the CATS Parties.

    (C) The Gas Sales Agreements have been entered into on the date hereof."

    41. As Langley J observed at p 20 of his judgment, the overall context was the deregulation of the power supply industry in the United Kingdom and the consequent opportunities to compete in a market. The CATS Parties were aware that very large quantities of natural gas were soon to become available in the Graben area of the North Sea. They were the holders of interests in the Everest and Lomond fields, of which Amoco was the operator. In order to reach the market their gas would have to be transported to processing facilities onshore. The only practicable means for this to be done was by way of a pipeline to the nearest convenient point, which was at Teeside. The laying of a pipeline under the North Sea for the distance required, which was more than 250 miles, was a substantial and very expensive undertaking.

    42. It made good sense in these circumstances to design a pipeline which would be capable of transporting very large quantities of gas. The ability to commingle gas from a number of customers within the same pipeline would offer the prospect of the use of the facility by the developers of several other fields in addition to those which were being developed by the CATS Parties. Contracting for its use by other developers would provide the CATS Parties with a return on their investment. In addition to the profit which they could expect to make on the sale of their own gas, they would have the benefit of a stream of income in the form of payments made by others for the use of the facility. Almost every commercial enterprise depends upon the investment of capital with the expectation of profit in return. The proposal for the construction and operation of the CATS System was just such an enterprise.

    43. Step by step these arrangements were put in place. On 10 September 1990 agreements were concluded by Teeside Power Ltd for the purchase of gas to be produced from the Everest and Lomond fields. This gas, which was to be transported by means of the pipeline to Teeside under the Everest/Lomond Transportation Agreements, was to be used as a feedstock for a power station which was to be constructed there by TPL. On the same date the CATS Parties entered into the CRTA with TGTL. TGTL had not yet entered into an agreement for the purchase of gas from any developer. But they were able for their part, by reserving capacity in the pipeline, to acquire the ability by this means to transport a further quantity of gas from other fields. This enabled them to purchase gas which they could bring ashore, process at Teeside and then sell. It was only after these agreements had been entered into that the work of constructing the pipeline was put in hand.

    44. On 26 March 1993, against the background of the CRTA, agreements were entered into with the owners of the J-Block fields by which the owners of these fields sold all the gas in J-Block to Enron Europe Ltd (EEL), one of the participants in TGTL. On the same date agreements were entered into with TGTL for the transportation of the J-Block gas to Teeside using TGTL's reservation under the CRTA of capacity in the CATS pipeline. Contracts were subsequently entered into by the CATS Parties with the developers of a number of other fields for the transportation of their gas to shore by means of the CATS pipeline.

    45. It is hard, in this context, to see the provision in the CRTA which defines the expression "Commencement Date" as having the function which the respondents say ought to be attached to it. Their argument is that the phrase "the CATS Transportation Facilities are available to perform the Transportation Service" in head (c) of the definition requires that the facilities must actually be able to perform that service on that date. Nothing short of an actual ability to perform the service will do. As Mr Sumption QC put it, the service could only be said to have been available on that date if TGTL could step in then and use the facilities. "Availability" according to this argument was a question of fact. It was to be measured by the completeness of the facilities to perform the service of transporting the gas.

    46. But the consequence of this approach is to treat the giving of the notice by the CATS operator as amounting to a warranty. So treated, the definition would lead to a state of uncertainty as to whether or not there was a Commencement Date until the Capacity Facilites had been tied-in, certified, tested and commissioned and were found in fact to be capable of delivering gas to the facilities: see clause 5.14. This is because the notice given by the CATS Operator would be at risk of being set aside in the event of the discovery of a defect which rendered the facilities, albeit temporarily, incapable of performing the Transportation Service. The contract would, in that event, once again be without a Commencement Date until the defect had been rectified. This would remove from TGTL the right to the Transportation Service under clause 6.1, and it would remove from the CATS Parties to right to receive the Send-Or-Pay Payments under clause 7.4.

    47. Of these consequences, the removal from the CATS Parties of the income stream represented by the Send-Or-Pay Payments and the obligation to repay to TGTL the payments already made by them is the most difficult to reconcile with the commercial purpose of the agreement. The investment in the construction of the pipeline and in the reservation of capacity was an exercise in commercial judgment on both sides. Part of the return on their investment by the CATS Parties was to be obtained by means of payments made by others for the use of the pipeline. In the case of the CRTA, it was to be obtained by means of the payments which TGTL agreed to make for the reservation of capacity with effect from the Commencement Date. From the point of view of TGTL the return on their investment was the price that they could charge others for the purchase of gas which they could then transport by using the reserved capacity. The cost of that investment was the price which they undertook to pay to the CATS Parties for its reservation in the form of the Send-Or-Pay Payments with effect from the Commencement Date.

    48. From both points of view it made commercial sense for the Commencement Date to be a fixed point of time which was to be identified once and for all by the giving of a notice by the CATS Operator. All that was needed was a declaration made in good faith by the CATS Operator that the CATS Transportation Facilities were available. The obligations which the CATS Parties undertook in terms of clause 3.1 to cause the CATS Transportation Facilities to be constructed and capable of performing the Transportation Service by 1 April 1993 provided TGTL with a sufficient basis for obtaining a remedy from the CATS Parties in the event of loss due to the fact that the facilities were not actually available on that date. The remedy which TGTL seek in these proceedings, which includes calling for the repayment of all the Send-Or-Pay Payments already made, bears no relation to any loss sustained by them. It is a far more extreme remedy for the emergence of a defect in the facilities prior to tie-in than the parties can be expected to have had in view when the agreement was entered into.

    49. For these and the further reasons given by my noble and learned friend, Lord Hoffmann, whose judgment I have had the advantage of reading in draft and with which I agree, I consider that notification of a Commencement Date could validly be given under the CRTA even although, due to a latent defect or for some other reason unknown to the CATS Operator. the facilities were not in fact available to perform the Transportation Service on that date. So I, too would allow these appeals and restore the order made by Langley J.

    50. In Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd's Rep 209, which was another case arising out of an elaborate contract relating to activities in the North Sea by the oil and gas industry, I said at pp 223-224 that I thought that it was unlikely that the result in that case was one which had been intended by the parties as it seemed to me to be at odds with the commercial purpose of the agreement. It is satisfactory to find that it has proved to be possible in this case to construe the agreement in a way that is consistent with its commercial purpose and the context in which it was entered into.

LORD HOBHOUSE OF WOODBOROUGH

My Lords,

    51. In agreement with my noble and learned friends Lord Hoffmann and Lord Hope of Craighead, I too would allow these appeals and restore the orders made by Langley J. Like my noble and learned friends I also agree in substance with the reasons which Langley J gave for his decision. It was firmly based upon the findings of fact which he made and his understanding of the commercial structure and purpose of the Agreement. I will come back to his findings of fact shortly but the argument of the respondents and the decision of the Court of Appeal was founded on just one of them:

    "(10) The T6 Entry Point was first inspected by Rockwater (Phillips' contractors) in late October 1994. A welded connection was then contemplated. The valves were found to be not sealing as they should causing leaks of gas. The probability is that the condition of the valves was the same on 1 April 1993. The leaks were such that a tie-in by either weld or flange could not have proceeded then and investigation of the problem was required."

Thus it is argued that on 1 April 1993 the valves were not in working order and the Facility was not available to perform the transport service.

    52. The function of a notice provision in a contract is normally as part of the machinery of the contract. It serves to trigger or define other rights and obligations under the contract. That is undoubtedly its function in this Agreement: the service of the commencement date notice triggers obligations of both parties to the Agreement. The definition shows that it is a notice to be given by the CATS Operator only when it has satisfied itself, for its own protection, of certain matters. As my noble and learned friends have explained, the character of the notice is as an expression of the willingness of the Operator to proceed to the next, mutual, stage of the implementation of the contract, accepting for itself the attachment of the further contractual obligations which arise from proceeding to that stage. The delivery of the notice is an act which brings into effect obligations set out elsewhere in the Agreement; it does not itself create any obligations for either party.

    53. But I do not consider that the notice provision should be construed from the point of view of the Operator alone. There are two reasons for this. The first is that the service of the notice impacts on both parties. It triggers important monetary obligations for the respondents: from 6.0am on the Commencement Date they must start making the 'send-or-pay' payments "in consideration of the reservation of the Capacity Reservation and the provision of the Transportation Service" (cl.7.1 and 7.4). Paragraph (c) of the Commencement Date definition presupposes that the CATS Transportation Facilities exist; otherwise how can they be available? I do not accept the respondents' argument that the service of the Commencement Date notice involves any warranty or undertaking. But I am prepared to accept that the Agreement, as a matter of construction, should be read as including, as a condition of the right to serve the Commencement Date notice that there is a Facility available to perform the Transportation Service. The various phrases used in paragraph (c) are defined phrases involving cross-references to other clauses in the Agreement - cl.3.1 for the Facilities and cl.6.1 for the Service. Cl.3.1 imposes an obligation upon the CATS parties, by 1st April 1993, to cause the Facilities to be constructed and "capable of performing" the Service. The obligations under cl.3 are to be performed "in accordance with the standard of a Reasonable and Prudent Operator" (an elaborately defined term used in a number of places in the Agreement). The Facilities include the Entry Points into which the Respondents were entitled to tie in. Thus far the argument follows a familiar logic analogous to the interpretation of other contracts. It is at the next step that I consider that the argument and the reasoning of the Court of Appeal becomes erroneous.

    54. The respondents' argument, successful in the Court of Appeal, is that, for a valid notice to be served for 1st April 1993, the Facilities including the relevant Entry Points must be in such a state of completeness and readiness that the respondents could on that very day tie in to the Entry Point(s) and feed gas into the pipeline. Using finding number (10), they say that, because on that day the valves would leak excessively if simply closed without any remedial operational steps being adopted, the Facility would not have been available (or capable of performing the Service) and the condition entitling the Operator to serve the Commencement Date notice would not have been satisfied. The argument is erroneous both in law and in fact. I will take the law first.

    55. I accept that the fulfilment of any conditions to the service of the notice has to be considered as at the date of the notice. It is therefore legitimate to consider what was the state of affairs on 1st April 1993. But it is a fallacy to proceed from that proposition, as it seems did the Court of Appeal, to the proposition that it must be possible to tie in on 1st April 1993. This was an Agreement for the provision of a right to share the use of a pipeline and terminal. It was not a 'turn-key' (or as it was put a "push-button") contract for a piece of equipment or a system. Tying in to an Entry Point was a necessary preliminary to making use of the pipeline and the requirement that the Operator accept the respondents' gas. Tying in is the responsibility of the respondents and detailed requirements have to be fulfilled by them in order to do so: clause 3.4 and clauses 5 and 8. The judge rightly held that the nature of the business in which the parties were engaged and the structure of the Agreement was one which required the parties to co-operate and contemplated that there would be problems which would have to be worked out. As the judge put it in his finding number (23), accepting the evidence of Mr Styles, "there was never any question or expectation that Phillips could or would just turn up and get on with the tie-in". The use of the word "available" in the definition means exactly what it says: the Operator is making the Facilities available to the respondents to perform the Service. The use of that word does not import that no problems can arise. As explained, the notice triggers other obligations. Having given the notice, the Operator may become liable for breaches of those obligations but the notice is still an effective notice. Indeed, it is the effectiveness of the notice which premises the liability of the Operator for the non-performed or defectively performed obligation. To treat such a breach as invalidating the notice would, as my noble and learned friends have said, negate the structure of the Agreement.

    56. But this is not necessarily the end of matter since I have accepted that the definition should be construed as including certain conditions upon the right of the Operator to serve the Commencement Date notice. I have accepted that the defined phrases used in paragraph (c) necessitate looking also at cl.3.1 and cl.6.1. The word used in cl.3.1 is "capable". In the context of this commercial Agreement, this is a commercial term not a scientific one. But, anyway, saying that 'x' is capable of something is to state that when some further things ('y' and 'z') happen 'x' will produce the relevant result. The respondents' argument involves making an assumption about 'y' and 'z' which is not justified or appropriate upon a fair reading of the Agreement as a commercial document. The respondents need to be able to say that any adjustment or adaptation is to be excluded and that no refinement of the tie in procedure can be made even though it can be made in the ordinary course and without distorting or negativing the contractual structure or the parties' commercial purpose. The commercial interpretation is reinforced by the references to the "standard of a Reasonable and Prudent Operator". Commercially capable means capable within commercially acceptable parameters. If the Transportation Facilities (which include the Entry Points) are capable of performing the Transportation Service in a commercially acceptable way, that suffices. It is commercially acceptable that the testing of the Entry Points in situ should be left until the time when they are going to be used to tie in to the pipeline (the judge's fifth finding). It was commercially acceptable that any problems then discovered, a fortiori any operational problems, should then be sorted out. It is not commercially acceptable to treat some complication, albeit arising from some feature of the Facilities, as altering the financial structure of the Agreement. Such a result is not to be found in the use of the word "available" nor in the word "capable". The financial scheme was that the respondents were buying into the facilities whether they chose to use them or not. The Facilities involved an extensive physical and contractual structure required for the transport of gas from a number of fields in the North Sea to delivery ex a terminal at Teesside. The construction of the definition of "Commencement Date" argued for by the respondents is irreconcilable with this scheme.

    57. But the judge's findings show that the respondents' argument is also unsustainable on the facts. Mr Sumption QC emphasised that when first tested by the respondents' contractors, the valves malfunctioned. He submitted that this was due to an imbalance between the volume of the spaces within the spool and the size of the 2" vent valves intended to release the pressurised gas from them. This would have been a design fault. Whilst it is correct that the size of the vent valves would have affected the speed at which gas would pass through them, this was not the critical factor; it was, as the appellants' expert witness testified and the judge found, the rapidity with which the vent valve was opened. In the actual tie-in procedure, both as originally planned and as executed, the contractors fitted their own valves on the end of the vent pipes and their solution was to use quick release 2" quarter-turn valves. The evidence did not support the factual relevance of Mr Sumption's technical argument. It was not the finding of the judge and was not the basis of the Court of Appeal's decision to allow the respondents' appeal.

    58. As regards the cause of the leakage across the 24" valves, the judge found that its cause was the failure to create a sufficient pressure differential, (12), that this was not due to a manufacturing or design defect, (13), that the tie-in could be and was achieved without any alteration or repair to the valves and without any modifications to the Entry Point as it existed on 31 March 1993, (24), and that, even if the contract had required the making of a welded connection, this would in fact have been possible, (21). As regards the respondents' (ie Phillips') timetable, the judge found that the correct assessment of the situation and what needed to be done had been made by 9 December 1994, (13), that it was not in doubt that a tie-in could and would be achieved successfully within the time scale required by Phillips, (14), and that he, the judge, was satisfied that "there was never any real likelihood that a successful tie-in could not be achieved to the existing assembly and that following Phillips' letter of 11th November 1994 any doubts about whether it could be achieved to meet Phillips' timetable were quickly dispelled", (22).

    59. My Lords, the decision of the Court of Appeal was mistaken both in construing the Agreement as if it was a 'press button' contract and in failing to give effect to the judge's findings of fact.

    60. Finally, I should mention cl.7.5. This was of the nature of an off-hire clause. The respondents argued that it lent support to their submitted construction of the Commencement Date definition. I consider that it had an opposite effect. Cl.7.5 provided the respondents with a measure of protection after they had started to make the 'send-or-pay' payments; it was thus adverse to their submission that unexpressed implications needed to be read into the definition. On their substantive argument, the respondents fared no better. Cl.7.5 is drafted by reference to the phrase "unable or fail to redeliver". This phrase, on any view, raises the same considerations as I have discussed earlier. The respondents' case fails for the same reasons of law and fact. But there was a further difficulty for the respondents in relation to the use of the word "fail" in cl.7.5. It is not necessary to express a concluded view but it is probable that "fail" is used in this clause in a more restricted sense as is shown by 7.5.(b)(i)(C). However, the respondents simply have not got the findings of fact to enable them to succeed on any reading of cl.7.5.

    61. For these reasons and those given by my noble and learned friends, I would allow these appeals and make the orders proposed.

LORD SCOTT OF FOSCOTE

My Lords,

    

 
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