Court of Appeal considers construction of North Sea gas sales agreements and remedies for breach

01/11/16

The Court of Appeal has dismissed an appeal concerning the construction of long term gas sale and purchase agreements (the ‘Agreements’) and the contractual consequences of the failure to supply gas from the North Sea.

The Andrew Field is a North Sea oil and gas field 230 km north east of Aberdeen. The Appellant, Scottish Power, was the buyer of gas from the Andrew Field pursuant to the Agreements. From May 2011 until December 2014, the Respondent Sellers shut down production from the Andrew Field in order to ‘tie in’ a nearby oil and gas field to the Andrew Field. As a result, the Sellers made no deliveries of gas to Scottish Power. 

Scottish Power sought damages for breach of the Sellers’ obligation to operate the relevant production facilities, which it suggested amounted to £85 million. The Sellers contended that Scottish Power’s relief was confined to a compensation mechanism set out in the Agreements, which involved the supply of gas at reduced price after deliveries of gas resumed (or ‘Default Gas’), but which excluded any claim for damages.

After a trial of certain preliminary issues [2015] EWHC 2658 (Comm.), Leggatt J held that, on the proper construction of the Agreements, Scottish Power was not entitled to maintain its claim for damages, but its remedy was limited to Default Gas.

The Court of Appeal agreed with Leggatt J and dismissed Scottish Power’s appeal. Christopher Clarke LJ gave the leading judgment.

The Court analysed the provision of Default Gas as a contractual remedial regime which was intended to be comprehensive and was to the exclusion of any other remedy. It held that it would be odd in the event of a breach of the obligation to operate the facilities that Scottish Power should have a remedy in addition to that provided by Default Gas. It dismissed Scottish Power’s arguments on construction of the Agreements as having a degree of legal finesse which commercial men are unlikely to have contemplated.

Scottish Power argued, among other things, that Leggatt J had not correctly applied the presumption that parties do not intend to give up rights which the general law gives unless clear words are used to exclude or limit such rights (sometimes referred to as the Gilbert-Ash presumption). The Court considered the scope and application of Gilbert-Ash, and endorsed the approach of Leggatt J. The Court observed that the strength of the presumption is reduced in proportion to the degree of derogation from the common law position. In this case the Default Gas provision was not a pure exclusion clause, but one which replaced common law rights with a different contractual remedy which could, in some circumstances, be more valuable than the right to damages.

The judgment appears here.