Upstream gas sales: of capacities and counterfactuals

Lack of unambiguous drafting in a gas sales contract landed three hydrocarbon giants in the Court of Appeal today; it also raised a nice point about damages and counterfactuals.

In British Gas v Shell UK [2020] EWCA Civ 2349, Shell and Esso agreed to supply, and BG to buy on a take-or-pay basis, a minimum daily quantity of gas (appearing in the forest of acronyms typical of hydrocarbon contracts as a TRDQ, or Total Reservoir Daily Quantity). The sellers controlled a couple of reservoirs which, together with others, were connected to the well-known Bacton terminal in Norfolk. As might be expected, gas from all the connected reservoirs was commingled before it came on shore, and the owners of the various reservoirs, including the sellers, had a practice of “borrowing” gas from one another to meet variations in demand. In order to protect BG’s interests, the sellers in addition undertook under Clause 6.4 of the contract to “provide and maintain a capacity (herein referred to as the ‘Delivery Capacity’) to deliver Natural Gas from the Reservoirs” amounting to 130% of the relevant daily quantity. If the capacity was reduced, then the sellers had a right to reduce the TRDQ proportionately.

As capacity in the North Sea ran down, the sellers’ capacity to supply from their own reservoirs dipped below the magic figure of 130%, though if you took into account their capacity to borrow gas the capacity remained adequate. BG saw an opportunity to sue the sellers. It argued that (1) “capacity” meant capacity from the sellers’ own reservoirs, excluding borrowed gas; and (2) had the sellers reduced the TRDQ to 100/130 of the reduced capacity, it would have bought in all excess requirements more cheaply elsewhere.

The Court of Appeal held for BG on (1): capacity on an ordinary interpretation meant capacity from the sellers’ own resources, not third parties’, so that the sellers were in breach. On damages, however, it held that BG had suffered no loss. The sellers had had a right, but no duty, to reduce the TRDQ in line with the total capacity; they had not done so; and the fact that they might have avoided being in breach of the 130% stipulation had they done so was beside the point.

The decision in (1) seems right as a matter of interpretation, and also sensible: apart from anything else, capacity clauses exist to assure certainty of supply, and would be somewhat devalued if they took into account possible arrangements that the seller might enter into with third parties.

The damages point is an awkward one, as is always the case with the fiendish counterfactual question “what would have happened if the defendant hadn’t been in breach?” It turns, it is suggested, on a proper interpretation of the sellers’ contractual obligation. Was it (i) to maintain a capacity to supply amounting to at least 130/100 of the TRDQ, or (ii) to set a TRDQ amounting at most to 100/130 of its capacity to supply (not quite the same thing)? Given the provision that there was a right but no duty to reduce the TRDQ in line with capacity, the latter answer seems correct. If so it follows, at least in the view of this blog, that BG’s claim against the sellers for substantial damages was rightly rejected as a claim for failing to do what they had not been bound to do in the first place.

Just one more thing. Before you file this case away as a useful piece of ammunition on the damages point, remember that in every case of this sort, the answer – and often many millions of dollars – is likely to turn on a careful reading of the underlying contract. A decision on one particular piece of wording may well not be a reliable guide to another.

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