Court of Appeal finds for the CATS Parties in £40m North Sea gas dispute

07/04/20

The CATS system transports gas from the North Sea to the UK mainland: the CATS pipeline is one of UK’s principal gas supply routes.

The Appellant (“TGTL”) reserved capacity in the CATS pipeline pursuant to a Capacity Reservation and Transportation Agreement (the “CRTA”) with the CATS system owners (the Respondents, known as the “CATS Parties”).  Pursuant to the CRTA, TGTL was obliged to pay the CATS Parties a Capacity Fee for five years at the end of the 28 year long agreement. The Capacity Fee was determined by a cost share formula, which was designed so that TGTL would pay its appropriate share of the overall costs of the operation and maintenance of the CATS system.

TGTL disputed its Capacity Fee liability and withheld sums which amounted to over £40 million. One of the central issues between the parties was the contractual construction under the CRTA of the “CATS Capacity” figure which broadly set TGTL’s proportionate share of the overall costs pool.

After a four week trial in the Commercial Court, Butcher J found in favour of the CATS Parties’ interpretation of CATS Capacity. TGTL appealed on the question of construction.  It argued that the judge had significantly undervalued the actual language used in the CRTA and had ignored the literal meaning of the relevant words.

On 7 April 2020, the Court of Appeal dismissed TGTL’s appeal. Males LJ gave the leading judgment and undertook the “unitary exercise” of contractual construction which considered: (i) the language of the relevant provision; (ii) other relevant provisions of the CRTA; (iii) the overall structure of the CRTA; (iv) the background circumstances known to the parties at the time the CRTA was concluded; and (v) commercial common sense. The Court accepted the CATS Parties’ submission that CATS Capacity needed to be the up-to-date CATS Capacity figure rather than some historic maximum that was set in stone. 

The hearing was one of the first hearings in the Court of Appeal to be conducted remotely during the current pandemic. Sir Geoffrey Vos C gave a judgment which explains the new Practice Direction 51Y which has come into force to cater for video and audio hearings during the pandemic. He commented on the flexibility of the arrangements that could be made “to continue to deliver fair, open and transparent justice in a period of national difficulty”.

The judgment is here.