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Contractual Implications of Closure of a North Sea Oil & Gas Field - The Scottish Power Decision
The recent UK High Court decision of Scottish Power UK Plc v BP Exploration Operating Company Limited & Others(1) contains a comprehensive analysis of a number of significant contractual implications following the decision to close down an oil and gas field in the North Sea.
The claimant in this case, “Scottish Power (the “Buyers”), entered into long-term gas sales agreements ( “GSAs”) with the four defendants (the “Sellers”) to purchase natural gas produced from the Andrew Field, an oil and gas field 230 km north east of Aberdeen in the North Sea. For over 3 ½ years, from 9 May 2011 until 26 December 2014, the production of natural gas from the Andrew Field was interrupted. The main reason for this was so that work could be done to “tie in” the Andrew Field with a nearby oil and gas field known as Kinnoull Field. This involved the modification of the Andrew Field platform to enable the latter to handle oil and gas production from the Kinnoull Field. The tie in was part of a commercial programme on the Sellers part to develop the Andrew Field platform as a base for managing oil and gas from nearby fields and this dispute centred on the contractual implications of the closure.
The Sellers acknowledged liability in respect of their commitment to deliver the daily quantities of natural gas nominated by the Buyers under the GSAs during the closure (of the Andrew Field). It was agreed between parties that the Buyers’ sole remedy for the breach was the compensation mechanism provided for in the GSAs, referred to as ‘Default Gas’ ie, the supply of gas at a reduced price once deliveries resumed. The Buyers maintained, however, that the Sellers were also liable for a separate duty of care under the GSAs to keep the facility operational. The Buyers claimed damages for breach of that duty, in addition to the contractual remedy of Default Gas, at common law.
The key questions that the judge considered in this case were:
1. Did the Sellers failure to operate the facilities necessary to produce and deliver the quantities of natural gas at the required times amount to a breach of the standard of a Reasonable and Prudent Operator (“RPO”) during the interrupted period?
2. If so, did the GSAs provide a sufficiently comprehensive remedial framework in respect of the non-deliveries such that the Buyers remedy was limited solely to Default Gas?
3. If so, was such liability excluded under the GSA by an exclusion of liability for “loss of use” or “loss of profits”?
4. Was compliance with the contractual reporting obligation in a GSA a condition precedent or condition subsequent to a successful claim of force majeure?
Approach to Interpretation
According to Leggat J., the resolution of the central issues depended on the interpretation of certain clauses in the GSAs. The judge stated that, in ascertaining what reasonable people in the situation of the parties expressing a shared intention would have meant by the words used, the court should take account of:
(i) the natural and ordinary meaning of the clause in question;
(ii) any other relevant provisions of the contract;
(iii) the overall purpose of the clause and the contract;
(iv) the facts and circumstances known or assumed by the parties at the time that the document was executed; and
(v) commercial common sense:(2)
The judge further stated that there are also certain presumptions of law which courts should apply in determining what is to be taken as the intention of the parties. A presumption relevant in this case was that each party to the contract was entitled to all those remedies for its breach as arise by operation of law, so that sufficiently clear language is required to exclude or modify the availability of such remedies(3).
Under the GSAs the Sellers were required, throughout the contract term, to provide, install, repair, maintain and operate the facilities at the Andrew Field in accordance with the “Standard of a Reasonable and Prudent Operator”. Both parties agreed that the Sellers failed to operate the facilities during the closure period. The core issue was whether the Sellers had acted in accordance with the standard of a “Reasonable and Prudent Operator” as defined in the GSAs.
The meaning of the “Reasonable and Prudent Operator” definition
The court held that, in deciding to shut down the Andrew Field, the Sellers had not complied with the standards of a Reasonable Prudent Operator and as a result they had not sought to perform their obligations to deliver natural gas to the Buyers but were taking a deliberate action not do so as part of a commercial strategy. As such, the judge introduced a requirement, that a person “seeking to perform its contractual obligations in good faith must be a person seeking to perform its contractual obligations”.
Interestingly, the judge did not address in his dicta (as the issue did not arise here) a hypothetical scenario in which a seller was unable to perform its contractual obligations as a result of a health and safety risk affecting the provision of the contractual services. Therefore, it is open to interpretation, whether the hard-line approach adopted by Leggatt J., in relation to the standards of a RPO requiring performance of the services under the contract, before satisfying that test, would be followed in a situation where the seller did not perform its obligations under the GSA as a result of an actual or foreseeable material health and safety risk to either the gas field or it’s workers.
The next question raised was whether the GSA remedy for default gas ie, a supply of discounted gas once deliveries resumed, prevented a claim for damages under general law. The key provision of the GSAs at the centre of that dispute stated that payment for Default Gas shall be “in full satisfaction and discharge of all rights, remedies and claims howsoever arising, whether in contract or in tort or otherwise in law on the part of the Buyer against the Seller in respect of underdeliveries by the Seller under this Agreement.” The court did not accept that there could only be a breach of the Sellers obligation to operate the facilities when there was an underdelivery of nominated gas. Nor did the court believe that default gas was the only remedy available for a failure to operate the facilities, and in such cases, common law damages may be available. However, in such circumstances where a failure to operate the facilities caused loss by way of underdeliveries, for which the Buyers automatically received compensation under the contractual framework, then the remedy of default gas, was the only remedy available for such loss. The court did not overlook the presumption that the parties did not intent to abandon remedies that arise by operation of law, but “that presumption must be less strong where the common law remedy is not simply excluded but is replaced by a different (and valuable) contractual one”.
The Exclusion Clause
The Sellers had contended that if damages were recoverable at common law, such damages would be excluded under the express “loss of use” or “profits” exclusions. The court held that these contentions were “untenable”. The judge viewed these clauses as excluding liability for certain types of future “consequential losses” over and above a basic measure of loss caused by breach of contract for failure to deliver the nominated gas under the GSAs. The Buyers claim did not fall within the first exclusion as they did not have any problems sourcing alternative supplies of gas in the open market to replace the gas which the Sellers should have delivered and thus there was no “loss of use”. Similarly, there was no claim by the Buyers that they had lost revenues or profits or any other benefit expected to be derived from use of the Sellers undelivered gas. The judge further stated that he was unable to accept as a matter of law that “a loss incurred in mitigating an excluded loss must in itself be regarded as a loss of the kind that is sought to be avoided, and therefore caught by the exclusion.”
The GSA force majeure clause stipulated that any force majeure event was to be notified to the other party within ten days and for the notifying party to furnish an interim report within five days of such notification. The force majeure clause also required to provide a thorough report clarifying the information contained in the interim report to the notifying party within twenty-eight days. The Sellers provided notice of force majeure and an interim report but failed to provide the comprehensive report. The Buyers asserted that full compliance with the provisions of the force majeure clause must be followed before the reliefs available in that clause could be relied upon by the Sellers, and if all the stipulations were not followed, then their claim to exclude loss based upon clause must fail. Leggatt J., noted a number of conflicting authorities on that question(4), but ultimately decided that the correct approach was to focus on the precise terms of the GSAs and to apply ordinary principles of interpretation. In applying this test, the court came to the conclusion that the failure to comply with the strict provisions of that clause was not a condition precedent (or condition subsequent) to a successful claim for relief for force majeure. First and foremost as there there were no words in the GSAs which stated that the consequences of a failure to comply with the provisions of the clause precluded a claim for relief.
The key points to note from this case are:
- A party that intentionally(5) avoids carrying out one of its contractual commitments cannot look to defend its position by relying upon the reasonable and prudent operator paradigm.
- A specific contractual remedy may usurp a common law right to damages where it is sufficiently clear that this was the intention of the parties.
- The presence of an exclusion clause in a contract for “loss of use” and “loss of profits” exclude certain types of future consequential losses and do not exclude the basic damages for breach of contract for failure to supply.
- Express terms are necessary in a contract if a notification procedure is to be deemed a condition precedent or condition subsequent to a claim of force majeure.
(1)  EWHC 2658 (Comm).
(2) See Arnold v Britton  2 WLR 593
(3) See Gilbert-Ash Northern Ltd v Modern Engineering (Bristol) Ltd  AC 689. Stocznai Gdanska SA v Latvian Shipping Co.  1 WLR 574.
(4) Mamidoil-Jetoil Greek Petroleum Co. SA v Okta Crude Oil Refinery AD  1 Lloyd’s Rep 1; The Azur Gaz  1 Lloyd’s Rep 163; Great Elephant Corporation v Trafigura Beheer BV  2 Lloyd’s 503
(5) However, please note that commentary above in relation to a seller not performing its contractual obligations on account of a material health and safety risk.
Written by Ronan O'Grady, Associate, Projects and Construction Group.