Sellers not liable for damages under long term Gas Supply Contracts

25/09/15

Leggatt J has today handed down judgment on five preliminary issues concerning the interpretation of long-term gas sales agreements (“the GSAs”) and the contractual consequences of the failure to supply natural gas from an oil and gas field in the North Sea.

The Andrew Field is an oil and gas field 230 km north east of Aberdeen in the North Sea. From May 2011 until the end of 2014, the Defendants, the owners of the Andrew Field, shut down production from the field. The reasons for the shutdown included the ‘tie in’ of a nearby oil and gas field, the Kinnoull Field, to the Andrew Field. 

The Claimant, Scottish Power, was the buyer of natural gas from the Andrew Field pursuant to the GSAs. During the period of the shutdown, no deliveries of natural gas were made to the Claimant. The Claimant alleged that in deciding to shutdown the Andrew Field in order to tie in Kinnoull the Defendants acted in breach of their obligation to operate the relevant facilities and sought very substantial damages for breach of contract. 

The five preliminary issues included issues whether the Defendants had complied with the Standard of a Reasonable and Prudent Operator in deciding to shut down to tie in Kinnoull, and whether a notification requirement was a condition precedent or subsequent, or a form of intermediate term, to the Defendants’ claim for relief from liability for a period of the shutdown by reason of force majeure. 

A further key issue was whether the Claimant was entitled to claim damages as a result of the Defendants’ failure to supply natural gas during the shut down. The Defendants accepted that, at least for much of the relevant period, the failure to deliver natural gas was a breach of their delivery obligations under the GSAs, but contended that the compensation mechanism provided for in the GSAs, involving the supply of gas at reduced price after deliveries resumed (or ‘Default Gas’), applied. The Defendants said that the Default Gas regime was mandatory and applied whenever there was an underdelivery (except in certain specified cases, principally force majeure), regardless of the particular obligation of the GSAs that was breached. The Claimants however said that the Default Gas regime did not apply to limit the relief to which it was entitled for breaches of the obligation to operate the relevant facilities.

Leggatt J accepted the Defendants’ submissions and held that the Claimant’s claim for damages for breach of the obligation to operate was a claim in respect of the underdeliveries of natural gas and so within the meaning of the Default Gas regime. The Claimant is not therefore entitled to maintain its claim for damages but is limited to Default Gas.

Leggatt J granted the Claimant permission to appeal his Order in relation to the Default Gas issue.

A copy of the judgment can be found here.