Judgment for the CATS parties in North Sea gas pipeline dispute in Commercial Court

14/05/19

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

The Claimant (“TGTL”) reserved capacity in the CATS pipeline pursuant to a Capacity Reservation and Transportation Agreement (the “CRTA”) with the CATS system owners (the Defendants, 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.

The central issue between TGTL and the CATS Parties was determination of the amounts payable by TGTL as the Capacity Fee, pursuant to a contractual formula. Many of the issues turned largely on the proper construction of the CRTA and a number of related agreements, but the Court also considered the use of cost share allocation methodologies, technical issues relating to the pipeline, the correct accounting categorisation of expenditure to be treated as capital or operating expenditure, and the ability of the CATS Parties to revise (or ‘restate’) the sums due to them.

TGTL disputed its Capacity Fee liability, and withheld sums which (with interest) amounted to over £40 million. The trial of the action was heard by Mr Justice Butcher in the Commercial Court over four weeks in February 2019.

On 14 May 2019, Mr Justice Butcher handed down judgment. The CATS Parties succeeded on the vast majority of issues, including the principal issue of construction to determine the concept of “CATS Capacity” (which broadly set TGTL’s proportionate share of the overall costs pool).

The judgment examines some of the relevant principles of contractual construction where there is a long-term agreement subject to many amendments. In relation to long term contracts, it is often appropriate to adopt a relatively ‘flexible approach’ to construction. Further, where a long term agreement uses concepts that are in existence at the date at which the parties enter the agreement, but which change over time (such as accounting standards), the Court must consider how to interpret the contractual terms in the changed context. To that end, the Court may adopt a ‘mobile’ interpretation, provided it does not change the scope of the underlying contract.

The judgment is here.