ON APPEAL FROM QUEEN’S BENCH DIVISION, COMMERCIAL COURT
MR JUSTICE TOMLINSON
Royal Courts of Justice
Strand
London, WC2
B E F O R E:
THE MASTER OF THE ROLLS
LORD JUSTICE KEENE
LORD JUSTICE JACOB
BRITISH GAS TRADING LTD
CLAIMANT/APPELLANT
- v -
1) AMERADA HESS LTD
2) PERENCO UK LIMITED
DEFENDANTS/RESPONDENTS
(DAR Transcript of
Smith Bernal Wordwave Limited
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
MR J MCCAUGHRAN QC (instructed by Messrs Herbert Smith, London EC2A 2HS) appeared on behalf of the Appellant.
MR L RABINOWITZ QC and MR S JOHNSTON(instructed by Messrs Denton Wilde Sapte, London EC4A 1BU) appeared on behalf of the Respondents.
J U D G M E N T
THE MASTER OF THE ROLLS:
Introduction
This is an appeal by British Gas Trading Limited (“BGTL”) against an order of Tomlinson J made on 23 February 2006 in which he dismissed BGTL’s claim for a declaration that notices served by the respondents (“the sellers”) to terminate two gas contracts were invalid. The appeal is brought with the permission of the judge. The appeal raises the question whether the notices complied with the contractual terms under which they were issued. The judge held that they did. BGTL says that he was wrong so to hold, whereas the sellers seek to uphold the decision of the judge substantially for the reasons he gave.
The Contractual Background
I take the contractual background essentially from the judgment. The sellers operate two gas fields in the North Sea called the Leman field and the Indefatigable or Inde field. The sellers sell gas produced by the fields to BGTL. The parties’ rights and obligations are contained in two contracts per field; in each case a contract between Amerada and BGTL and a contract between Perenco and BGTL, namely the Leman Principal Agreement and the Inde Principal Agreement (together “the Principal Agreements”). Perenco is short for Perenco UK Limited who operate one of the fields.
Except in one respect, the Principal Agreements are identical. The Principal Agreements are depletion contracts under which the buyer agrees to buy all or a fixed percentage of the estimated economically recoverable reserves of the fields until they are exhausted or depleted of those reserves. In general terms, the buyer of gas under a depletion contract will determine the economic life of a field, because he makes nominations under the contract that determine how much gas a seller should extract, or attempt to extract, from a field. If a buyer makes high nominations, the field’s reserves are depleted faster, and therefore sooner, than if lower nominations are made. Moreover, the extraction of gas from a field leads to a decline in the pressure of the reservoir, because the remaining gas has a larger space to fill, with the result that the overall pressure of the reservoir drops. Although it is possible to halt the decline in pressure and the fall in production by installing extra facilities, this makes production more difficult. It also makes production more expensive because, for example, it is necessary to burn gas to run compressors. As further gas is extracted, there will inevitably come a point at which it becomes uneconomic to continue production from that field. Production in both fields peaked in about 1977 and has been in decline for over two decades.
The Principal Agreements have been extended from time to time. The present termination date of the Principal Agreements is 17 September 2010. In order to enable the sellers to ensure that before that date they are not obliged to keep selling gas to BGTL even after production has ceased to be economic for them, Article XIX of the Principal Agreements provides for termination when continued production of gas is no longer “economic” for the sellers. On 29 March 2005, the sellers served notices to terminate the contracts under Article XIX.3(b) in each case. The notices stated so far as relevant:
“In accordance with Article XIX, Clause 3 of the Principal Agreement the Seller, as from the date hereof, gives not less than eighteen (18) months notice to the Buyer that the Seller, pursuant to Article XIX, Clause 1 of the Principal Agreement, believes that, in the Contract Year October 2006 to October 2007 (“the Relevant Year”), as a result of natural decline of reservoir pressure the continued production of natural gas from the Reservoir will no longer be economic for the Seller and the other producers on the basis that the Production Costs will exceed the Gross Revenue for the Relevant Year.
Defined terms used herein shall have the meaning ascribed to them in the Principal Agreement …”
The essential issue between the parties is whether the notices contained “reasons” as required by Article XIX.3(b) under which they were issued. Article XIX.3(b) provides:
“3. If the Seller believes it is entitled to terminate this Agreement pursuant to Clause 1 above the Seller shall (together with the other Producers) give [BGTL] not less than eighteen (18) months notice prior to the beginning of the Relevant Year and such notice shall
(a) specify the relevant year and
(b) give reasons why the Seller believes it will no longer be Economic to continue to produce natural gas from the Reservoir during the Relevant Year.”
On 28 September 2005 BGTL issued notices of objection under Article XIX.4 in respect of the sellers’ notices. By its part 8 claim, BGTL sought a declaration that the notices were invalid because they did not contain “reasons” as required by Article XIX.3(b). The sellers contended that the notices did contain “reasons” as required by the clause, and the judge agreed.
The Principal Agreements
Article XIX, as contained in both Principal Agreements, provides so far as relevant as follows:
“Article XIX Termination
Unless sooner terminated under Article III hereof this Agreement shall terminate when continued production of natural gas from the Reservoir is no longer Economic for the Seller and the other Producers (under this Agreement and the other Producers’ corresponding agreements with [BGTL]
For the purpose of this Article “Economic” shall mean that over a period of one (1) Contract Year (hereinafter called the “Relevant Year”) Gross Revenue will exceed Production Costs.
Provided that in any such determination of whether continued production of natural gas hereunder is Economic it shall not be assumed for the purposes of establishing Production Costs that the Seller and the other Producers would incur Production Costs of a non-recurring nature in excess of a sum equal to twenty-five million (25,000,000) pounds sterling (such sum being adjusted at each Review Date by multiplying it by PPI divided by PPIo.”
PPI and PPIo are then defined.
Article XIX.2 continues:
“For the purposes of the foregoing provisions
“Production Costs” shall mean
those costs which it is anticipated would be incurred by the Seller and the other Producers (and which would not be incurred if production from the Reservoir ceased) directly related to
the inspection maintenance repair and operation of the Delivery Facilities
the premiums incurred in insuring compulsorily insured risks and other liability risks normally insured by a reasonable and prudent operator in similar circumstances
those direct overheads justifiably associated with the costs referred to in sub-clauses (A) and (B) above (and which are not already included therein) and the Seller shall if so requested produce past figures for all such overheads.
all royalties and Indirect Taxes which would be borne and payable by the Seller and the other Producers on the natural gas which would be produced and sold from the Reservoir on the assumption that [BGTL] would take and pay for the respective Annual Contract Quantities under this Agreement and the other Producers’ corresponding agreements with [BGTL] during the Relevant Year.
Provided Always that where any Production Costs are incurred which relate to a period longer than the Relevant Year or are of a non-recurring nature only that proportion of such Production Costs as is reasonable in the circumstances having regard to the nature of such costs shall be included for the purposes of Clause 1 above
but Production Costs shall not include
any premiums for insuring the Delivery Facilities against physical damage or loss or
any Sunk Costs
other non-avoidable fixed costs which would be incurred irrespective of actual production including (without prejudice to the generality of the foregoing) interest payments depreciation charges and abandonment costs or any provision therefor”.
There then follow definitions of “Sunk Costs”, “Gross Revenue” and “Indirect Taxes”. I have already set out Article XIX.3.
Article XIX.4, 5 and 6 provide:
“4. If [BGTL] does not agree with the Seller’s notice then it shall (not later than twelve (12) months prior to the start of the Relevant Year) serve notice of objection thereto and the matter may be referred (at the request of either party) to an expert for determination under Article XXI hereof and such expert shall thereupon determine whether or not continued production of natural gas from the Reservoir will cease to be Economic during the Relevant Year
Provided that if [BGTL] does not serve notice of objection as aforesaid it shall be deemed to have agreed with the Seller’s notice and this Agreement shall terminate as at the beginning of the Relevant Year
5. Any termination under this Agreement shall not affect any rights or obligations which may have accrued prior to such termination
6. Any determination by the expert that the Seller is not so entitled to terminate this Agreement as aforesaid shall be without prejudice to any subsequent notice served by the Seller and the other Producers under this Article Provided that only one such notice may be served hereunder in respect of any single Contract Year”
The only respect in which the Principal Agreements are not identical is this. On 27 April 1993 the Inde Principal Agreement, but not the Leman Principal Agreement, was amended by the addition to Article XIX of a new clause 7 to permit BGTL to propose certain modifications to the sellers when it has received a termination notice in relation to that Principal Agreement.
The provisions under which an expert is to determine any dispute are contained in Article XXI. Article XXI.1 provides for the appointment of one or more experts depending upon whether the parties can agree on a single expert. Article XXI otherwise provides, so far as relevant, as follows:
“3. The parties shall make such submissions and supply such information to the expert or experts as they may think fir and the experts shall be entitled to make such enquiries and receive such submissions or information from the parties or from other persons as they may require for the purposes of resolving the dispute (but the parties shall only provide such information at their discretion)
Provided that the parties shall endeavour to limit the submissions and information given to experts to the specific area or areas of disagreement and the parties shall endeavour to limit the responsibilities and determination of the experts to such area or areas
…
5. The experts shall consider all submissions and information made or given by the parties and before giving a final determination shall submit a draft thereof to the parties and the parties shall be entitled within fourteen (14) days thereafter to make representations to the experts
6. In any communication of the draft determination of the experts to the parties and in any final determination given by them the experts shall give reasons for their decision
…
9. Each party shall bear the costs and expenses of the expert appointed by it or on its behalf and also the costs and expenses of all counsel witnesses and employees retained by it and the costs and expenses of the third expert shall be apportioned between the parties in such proportions as the panel of experts shall in the circumstances consider proper”.
The Issue
As I said earlier, the issue between the parties relates to the proper construction of the requirement in the Principal Agreements for a notice to “give reasons for the Sellers’ belief that continued production will no longer be Economic”. In the sellers’ submission, the natural and ordinary meaning of the word “reasons” requires little analysis. They say that in the context of Article XIX.3(b) it requires the sellers to set out the reason why, in their view, at the point in the future identified, continued production from the reservoir will no longer be economic. They say that each of the notices was valid and effective because it (a) identified the sellers’ belief that they were entitled to terminate in accordance with Article XIX on the ground that continued production of natural gas from the reservoir would no longer be economic for the sellers on the basis that production costs would exceed the gross revenue for the relevant year; (b) identified the relevant year, i.e. the contract year, October 2006 to October 2007; and (c) identified the reason for the sellers’ belief that the continued production of natural gas from the reservoir would no longer be economic, i.e. “as a result of natural decline in reservoir pressure”. The judge so held.
By contrast BGTL says that the natural and ordinary meaning of the words “give reasons” is that a valid notice must include a reasonably detailed analysis of the sellers’ projected gross revenues, the sellers’ projected production costs and the reasons underlying those projections which, as it is put on BGTL’s behalf, is “sufficient to enable BGTL to form a view on the assertion that continued production would no longer be economic”. It follows on BGTL’s case that anything less than the provision of this analysis will cause the notices to be invalid.
The judge rejected BGTL’s construction of Article XIX.3(b). He said at paragraph 29 of his judgment:
“The conclusive point which to my mind emerges from this discussion is however that if the buyers’ construction … is adopted then there is opened up scope for enormous debate as to what precisely is required by way of the provision of information in order to render the sellers’ notice valid. Having regard to the consequences for the sellers should their notice be held to be inadequate I cannot believe that this was what the parties envisaged”.
Discussion
It is common ground that, as is evident, this appeal raises a short point of contractual construction. The principles of contractual construction are not in dispute. The particular term or terms of the contract under consideration must be construed in the context of the contract as a whole, which must in turn be set against its factual matrix or, put another way, having regard to its surrounding circumstances. We were referred to a number of authorities. However, none of them seems to me to be of any real assistance in deciding how Article XIX.3 of the Principal Agreement in this case should be construed. BGTL says that the effect of Article XIX.3(b) is that the sellers cannot simply state their conclusion that continued production will no longer be economic. They must give reasons supporting their conclusion. Moreover, given the nature of their conclusion, which is a purely financial one, the reasons given must provide financial information about the sellers’ anticipated gross revenue and production costs. It is common ground that the notices contained no financial information of any sort, so that if BGTL is correct, the notices are not valid notices under the Principal Agreement.
BGTL relies in particular upon Article XXI of the Principal Agreements, which I have already quoted. It relies in particular upon this sentence in Article XXI.6:
“In any communication of the draft determination of the experts to the parties and in any final determination given by them the experts shall give reasons for their decision”
BGTL invites the court to note in particular that the words “shall give reasons” which appear in Article XXI.6 are the same as those which appear in Article XIX.3(b).
BGTL’s submissions may be summarised in this way:
(1) The parties must have agreed to the requirement in Article XIX.3(b) that the sellers should give reasons for a purpose. They cannot be taken to have intended it as a pointless provision or a meaningless obstacle designed merely to make the sellers’ task in serving a notice under Article XIX.3 more difficult.
(2) The obvious basic purpose was to ensure that a notice served under Article XIX.3 should be informative.
(3) It is not in dispute that before the sellers can serve a notice under Article XIX.3 they must first have formed the belief that continued production in the relevant year will no longer be economic.
(4) It is also not in dispute that in order to hold such a belief, the sellers would need to carry out a reasoned analysis more than 18 months prior to the commencement of the relevant year in order to determine on the basis of forecasts what their gross revenue and production costs were likely to be in the relevant year. In order to carry out this exercise properly, the sellers would need to have regard to the definitions of gross revenue and production costs contained in Article XIX.2, so as to ensure, in particular, that only relevant items of cost were included and would need to make a number of reasonable assumptions about future production and future costs. As noted by the judge in paragraphs 15 and 16 of his judgment, all of this is common ground.
(5) Thus Mr Sanders, in his witness statement served on behalf of the respondents, says this:
“It is necessary for the Sellers to conduct an analysis of the relationship between Gross Revenue and Production Costs in order to work out whether this position [i.e. that production will no longer be economic] has been reached. The Sellers are bound to approach this analysis in accordance with the definitions and exclusions set out in Article XIX clause.2. If they consider that continued production will no longer be Economic, they shall issue a termination notice, specifying the matters set out in Article XIX clause 3, namely the Relevant Year and the reasons for the Sellers’ belief that it will no longer be Economic to continue production”.
(6) It follows that in serving a notice under Article XIX.3 the sellers are necessarily asserting a conclusion, namely their belief that continued production in the relevant year will no longer be economic. Moreover, this is a conclusion which they will have reached after a reasoned financial analysis in which a comparison will have to be made between projected gross revenue and projected production costs.
(7) Article XIX.3(b), in requiring the sellers to give reasons in the plural why they believe that continued production will no longer be economic in the relevant year, is simply requiring the sellers to set out reasons supporting the conclusion which they assert, i.e. not to state a bald conclusion but to state a reasoned conclusion. In order to do this the sellers would need to state what they anticipate their gross revenue and production costs will be in the relevant year and on what basis.
(8) This is the natural meaning of the words used in the context in which they are used.
(9) As already noted, the same words are used in Article XXI.6 requiring the experts to whom disputes may be referred for resolution to “give reasons for their decision”. The meaning of Article XXI.6 is obvious, namely that the experts must not simply state their decision as a bald conclusion, but must give reasons supporting it.
(10) The words “give reasons” should be given the same meaning in Article XIX.3.
(11) In contrast the judge, conscious that the same words appeared in the two Articles, concluded that they should be given a different meaning in each case. Thus, in the final sentence of paragraph 29 of his judgment he held that, whereas the draft or final expert determination must set out the substance of the reasoning process, the notice which sets in trail the process which may culminate in that expert determination need not. The judge was wrong in giving the same words in the same contract a different meaning.
(12) It is no coincidence that the word “reasons” appears in Article XIX.3(b) in the plural. Since Article XIX.3(b) requires the sellers to give reasons supporting a financial conclusion, it is hard to see how a single reason could be appropriate.
(13) As to this, in paragraph 14 of the judgment the judge agreed that it might be significant that the word “reasons” was used in the plural, but he said that the notices could not be invalid on the ground that they contained a single reason if there was in truth “only one reason informing the Sellers’ belief”. He then gave the example of some natural catastrophe affecting the field.
(14) The judge’s approach invites these comments:
The sense of the judge’s observations in paragraph 14 is that if there are in truth several reasons informing the sellers’ belief that production will no longer be economic, Article XIX.3(b) will not be complied with if the seller chooses to state only one reason in the notice. This must be correct, but having formed that view it is difficult to see how the judge reached the decision he did;
The judge does not suggest in paragraph 14, and rightly so, that decline in reservoir pressure might be an example of only one reason informing the sellers’ belief that continued production would no longer be economic. This is obviously right, because the fact that the reservoir pressure is declining has been known to all concerned for many years. It tells one nothing one way or the other about whether the financial conclusion asserted, namely that continued production would not be economic, is well supported. In this regard, BGTL points to a passage in paragraph 23 of the judgment in which the judge referred to the requirement in Article XXI.6. The judge said this:
“The language of giving reasons for a decision is very close to that of giving reasons why the seller believes it will no longer be Economic to continue to produce. In order for the parties to have a proper opportunity to make representations thereon, it would surely be necessary for the draft determination to set out the substance of the reasoning process. A determination which gave as the sole reason natural decline of reservoir pressure would surely be regarded by the parties as inadequate for that purpose. Since the buyer is called upon by Article XIX.4 to decide whether or not it agrees with the seller’s notice and thus the seller’s belief, it might equally be thought essential for the buyer to know the substance of the reasoning process which has informed the belief with which it is being invited to agree or disagree”;
The judge’s recognition that the alleged reason given by the sellers was not on any view the only reason informing their belief that continued production would no longer be economic is also apparent from this sentence in paragraph 5 of the judgment:
“There is no doubt that the sellers could without difficulty have served notices which were more informative as to the reasons for their belief that they were entitled to terminate the agreements”.
This is obviously right, but it is again difficult to see how the judge, having expressed these views, then reached the decision he did;
(iv) Even in the extreme example given by the judge of a force majeure event causing a physical shutdown of production, BGTL does not accept that the sellers could comply with Article XIX.3(b) by simply referring to the occurrence of the event. If the sellers were to serve a notice under Article XIX.3 in such circumstances, they would still need to carry out an analysis of the kind referred to by Mr Sanders, forecasting their anticipated gross revenue and production costs in the relevant year. The cost of repair, or at least such of it as may be attributable to the relevant year, would be a factor to be taken into account in the sellers’ analysis.
(15) It is apparent that the only reason given in the notice is, “as a result of natural decline of reservoir pressure”. As the judge observes in paragraph 15 of his judgment, it is common ground that natural decline in reservoir pressure occurs in every field after the end of the plateau period and that in the case of the Leman and Inde fields, pressure has been declining for many years, indeed since 1977. This has not led to any previous suggestion that continued production would no longer be economic. By giving as the reason the decline in reservoir pressure, the sellers have told BGTL nothing that would enable BGTL to assess whether or not the conclusion asserted in the notices is well founded.
(16) In short, the sellers have asserted in their notices their conclusion that production will no longer be economic, and have further asserted that physical cause of the reasons which may or may not support their conclusion. They have not, however, stated what those reasons are.
(17) The sellers submitted to the judge that decline in reservoir pressure was the only reason upon which the sellers’ belief was based. This can be seen from paragraph 18 of the judgment, in which he summarised the sellers’ submission as being:
“Telling the buyers that the reason is the natural decline of reservoir pressure is useful to them because it tells them there is no other reason than that. It identifies the only ground upon which the seller’s belief is based.”
This submission is unsustainable and was not accepted by the judge. BGTL relies, for example, on paragraph 23 of the judgment which I have quoted. See also paragraph 5 which I have also quoted, in which the judge said that there was no doubt the sellers could without difficulty have served notices “which were more informative as to the reasons for their belief”.
(18) Having rejected the sellers’ submission that decline in reservoir pressure was the only reason for their belief, and that having held that there were other more informative reasons for that belief which were omitted, it is unclear why the judge then held that the sellers’ notices nevertheless complied with the Article.
(19) In paragraph 29 of his judgment, the judge held that it was a conclusive point against BGTL that, if BGTL’s construction of the notice provision were correct, then there would be opened up scope for debate as to what precisely is required by the provision of information in order to render the sellers’ notice valid. Far from being a conclusive point this, it is submitted, is a point of no weight. Reliance is placed upon paragraph 19 of Mr Wilson’s second witness statement, to which I will return in a moment. If the sellers approached the task of formulating a valid notice with care, there is unlikely to be scope for challenging its validity. The court would not permit the buyers to engage in a substantive debate such as would be undertaken before the experts as to whether the reasons given were good reasons supporting the conclusions stated.
(20) The judge rejected BGTL’s construction of Article XIX.3(b), but did not go on to say what the correct construction of Article XIX.3(b) was.
(21) Having rejected both sides’ submissions, on what basis did the judge hold that the sellers had complied with the Article? The answer by inference must be that the judge took the view that there were a number of reasons supporting or informing the sellers’ belief that continued production would no longer be economic, one of which was the decline in reservoir pressure, that the sellers were entitled to select this as a single reason to be given in their notice under Article XIX omitting the other reasons, and that they thereby complied with the requirement to give reasons, plural.
(24) The result is to deprive Article XIX of its basic purpose, namely that the notices should be informative. It also makes the Article a pointless provision if, in circumstances where there are a number of reasons, the sellers may give only one of them and may deliberately choose the one that it gives so as to be as uninformative as possible. What is the point of a requirement that the sellers should give reasons? The answer is, none.
(25) The judge appears to have placed some reliance upon a distinction between a clause requiring notice to initiate a dispute resolution procedure, and a clause designed to give notice to a party of the nature of the case it has to meet. He held that Article XIX.3 was rather closer to a provision requiring notice to initiate a dispute resolution procedure. Insofar as the judge relied upon decided cases in reaching this conclusion he was wrong to do so, because the only principle which emerges from the authorities is that each contractual provision must be construed in accordance with its own terms in the context of the contract in which it appears.
(26) The judge was in any event wrong to regard Article XIX.3 as a provision akin to one requiring notice to initiate a dispute resolution procedure. It contains a set of provisions giving the sellers an exceptional right to terminate a long term contract prematurely if certain conditions are satisfied, which is a very different thing.
(27) Under the provisions of Article XIX, the expert determination procedure is triggered, not by the sellers’ notice under Article XIX.3, but by the buyers’ notice of objection under Article XIX.4. The buyers’ notice need give no reasons. Upon receipt of a notice served under Article XIX.3, the buyer has a period of at least six months in which to decide whether or not to serve a notice of objection under Article XIX.4. The purpose of this period must be to allow the buyer to consider whether or not it agrees with the sellers’ notice or whether it wishes to object. That is plain from the opening words of Article XIX.4.
(28) In the course of deciding whether or not it agrees with the seller’s notice, the buyer may well also wish to enter into some discussion or negotiation with the seller. However, before doing so, it is necessary for the buyer to have appropriate information. In short, the six month period must have been designed to allow the buyer to consider meaningful financial information provided by the sellers in their notices to carry out discussions with the sellers on an informed basis and to decide, also on an informed basis, whether or not to object to the notices.
(30) The statement by the judge in paragraph 5 that BGTL should not be concerned as to the adequacy of the information contained in the sellers’ notices, given that they have a right to object thereby triggering an expert determination, cannot be right. In particular, if an explanation of the sellers’ reasons supporting their conclusion is provided then the buyer can take an informed decision and if necessary have discussions with the seller. The parties cannot have intended that the buyer should act in the dark.
(31) The new clause, Article XIX.7 in the Inde Principal Agreement, is a further pointer. In brief summary it gives the buyer under the Inde Principal Agreement the right, when objecting to a notice served under Article XIX.3(b), to propose modifications to the contractual terms. If the proposed modifications would result in the sellers’ gross revenue being greater than 105% of the production costs, then the agreements do not terminate but continue on the modified terms proposed by the buyer. BGTL will be significantly impeded in exercising its right to propose any such modification if it is not informed by the sellers of what they anticipate their gross revenue and production costs will be in the relevant year. This is a further reason supporting BGTL’s contention that the sellers’ notices had to provide financial information about gross revenue and production costs. Insofar as the judge reached a contrary conclusion, he was wrong to do so. In short, BGTL submits that the notices served on 29 March were not valid for want of reasons.
By contrast, the sellers’ submission is, as I have indicated, that the judge reached the correct conclusion essentially for the reasons he gave. In short, the sellers’ submissions are to this effect:
(1) BGTL’s submission that the parties intended to oblige the sellers to include in a valid notice detailed information relating to the sellers’ view as to its gross revenues and future production costs is wrong, because that is not what the clause says.
(2) BGTL’s interpretation of the clause requires additional words to be read into it identifying the information which it must produce.
(3) The judge considered an argument by BGTL that sought to minimise the obvious problems associated with the inherent uncertainty affecting its suggested approach, requiring as it did a valid notice to contain such unspecified information relating to gross revenue and production costs as would be “sufficient to enable BGTL to form a view on the assertion that continued production would no longer be economic” and placing the sellers in a position in which they could not know in advance precisely what it is that BGTL might consider it needed to know. As the judge said in paragraph 29:
“It is no answer to say, as Mr McCaughran did, that if the sellers give a fair picture the buyers will have nothing to complain about. In this complex field there is scope for argument as to what constitutes a fair picture, an argument which the court could only usually resolve with the assistance of expert evidence. Although the sellers’ notice might be served well before the deadline of 18 months prior to the beginning of the relevant Contract Year, there is no obligation upon the buyers to respond and they may serve notice of objection at any time up to not later than 12 months prior to the start of the Relevant Year. Thus the buyers need not assert or point out the inadequacy of the notice until it is too late for it to be remedied in time for the Relevant Contract Year …”
That reasoning is correct. The risk of tactical objections to notices leading to satellite litigation to determine their validity, and thus delaying the real substantive dispute being resolved, as the parties had agreed, by expert, cannot be underestimated given the very substantial amounts at stake for even one year’s non-economic production, and the lack of precision and certainty about what the sellers would have to do in order to serve a valid notice.
(4) These problems cannot be resolved by a submission that the sellers should simply present in their notices a fair picture or a fair summary.
(5) The six month period is a perfectly sensible period for the parties to provide for appropriate negotiation between the parties in relation to the future.
(6) If BGTL’s case on what was to be included in the notice were correct, this would mean that if the sellers wished to comply with Article XIX.3 they would have to provide, prior even to any dispute resolution process being instituted, very extensive detailed and commercially confidential information to BGTL, a competitive counter-party.
(7) In finding for the sellers, the judge rejected BGTL’s contention that a decline in reservoir pressure could not be a proper reason on which the sellers might rely in forming the view that production will become uneconomic, and that a notice containing this information contained no reason at all.
(8) Although the sellers accept, as is self-evident, that before serving the notices they will have carried out a detailed analysis of their projections as to future gross revenues and future production costs, before being able to serve bone fide notices under Article XIX.3 stating their belief that continued production would in the near future become uneconomic, it does not follow that the parties intended that the sellers, having done that detailed analysis, were bound to include it in the notice itself.
(9) The sellers accept that the purpose of the notice was to provide information to BGTL. The question remains what information the parties intended the notices were to provide. The notices informed BGTL that the sellers intended to seek to terminate the Principal Agreements on the ground that production would become uneconomic from the date identified. They also informed BGTL both of the reason why the sellers believed this would occur (the natural decline in pressure of the reservoir) and, necessarily, that the sellers did not have any other reason for thinking that this should be the case.
(10) BGTL’s criticisms of the judgment are not fair to the judge. The sellers rely on these points in particular.
It is not fair to the judge to say that he does not say what the correct construction of Article XIX.3(b) was. The judge rejected BGTL’s construction and accepted the construction of the sellers.
The judge was correct to hold that the expression “give reasons” in Article XIX.3 dealing with the sellers’ notices did not have the same meaning as the same words in Article XXI.6 dealing with obligations of any experts who have to determine the dispute between BGTL and the sellers. I will return to that in just a moment.
(11) It is wrong to criticise, as BGTL does, the judge’s statement at paragraph 5 of his judgment that there “is no doubt that the sellers could without difficulty have served notices which were more informative as to the reasons for their belief that they were entitled to terminate the agreement”.
In summary, the sellers say this:
The judge correctly drew a distinction between the reason relied upon by the sellers and the information relating to or underlying or informing that reason. It is not correct to suggest that the judge regarded all the underlying information as being reasons of the kind which Article XIX.3 required should be included in the notice. It is wrong to seek to treat all information underlying or supporting the reason as the reason itself.
The judge did not, as BGTL suggests, reject the sellers’ contention that a natural decline in pressure was the only reason they relied upon as having led them to conclude that the production would become uneconomic. Nor did he find, as BGTL suggests, that there were or must have been several reasons informing the sellers’ belief that production will no longer be economic. Rather, he simply pointed out that the sellers could have provided more information about the reason they had identified.
As the judge recognised, whilst it is true that the sellers might have given more information about the reasons “if they were not obliged so to do, that is an end of it” and “one reason why they did not serve more informative notices is undoubtedly because they did not wish to divulge to the buyers information which might weaken their bargaining position in any renegotiation of the contract price.”
As to BGTL’s submission that to allow the sellers to serve a notice that does not set out the detailed analysis of its projections for future gross revenue and future production costs “would enable the sellers potentially to gain an unfair advantage” in any future negotiations, there is no unfairness to either party. In short, the sellers’ case is that the judge’s construction of the Principal Agreements is correct.
Conclusion
I recognise that there are arguments which can be forcefully advanced on both sides of the question. Both the written and the oral submissions which I have tried to summarise demonstrate clearly that that is so. It was no doubt the reason that the judge gave permission to appeal. Having considered the detailed submissions on both sides, I have reached the conclusion that the judge was right. Like him, I prefer the submissions of the sellers to those of BGTL, notwithstanding the persuasive way in which they have been advanced by Mr McCaughran both in writing and this morning orally. My principal reasons for reaching this conclusion are these.
The purpose of the clause is to require the sellers to notify BGTL of the reasons why they believe that it will no longer be economic to continue to produce natural gas from the reservoir in the relevant year. That is what the clause says. I note that “reasons” is in the plural and not the singular. The plural must, however, include the singular if the sellers had essentially one reason for their belief. The notice simply says that the sellers believe that continued production will no longer be economic “as a result of natural decline of reservoir pressure”. In addition the notice expressly gives the basis of the sellers’ belief, namely “that the production costs will exceed the gross revenue for the relevant year”. It is true, as BGTL says that the natural decline of reservoir pressure has been going on for many years. However, the judge correctly accepted that there might be other reasons which led the sellers to believe that production would no longer be economic. There might be sand migration in the reservoir; there might be Government regulations increasing costs; or there might be a catastrophic failure of equipment. In this case the sellers say it was none of those but that the reason was the decline in production.
The sellers do not of course simply assert the decline, but give the decline as the reason why production will no longer be economic. “Economic” is defined in Article XIX.2 as meaning that over the relevant years gross revenue will exceed production costs. Thus the sellers are saying in the notice that they believe that in the year October 2006 to October 2007, the natural decline of reservoir pressure will cause production of natural gas to be uneconomic because production costs will exceed gross revenue. To my mind, so framed, the notice gives a clear reason for the sellers’ belief. The sole issue between the parties is whether the sellers should have given either further reasons, or further and better particulars of the reason they gave. The parties certainly could have so provided in the contract, but I agree with the judge that they did not.
I do not accept the submission that the judge did not set out his construction of the clause. He accepted the sellers’ construction. He concluded that the notice stated that there was one reason given by the sellers for their belief, namely that the natural decline of reservoir pressure would cause an excessive production cost over gross revenue. There was some discussion in argument as to whether that was one reason or more than one reason. In one sense it was one reason, although in another sense it was more than one reason, because the sellers’ belief depended on the one hand upon the conclusion that production costs would exceed gross revenue, and on the other upon the view that that fact was or would be caused by the natural decline of reservoir pressure. Whether analysed as one reason or more than one reason, the judge fully understood the position.
Mr McCaughran relies on the fact that Article XIX.3 requires the sellers to give reasons and not merely to state the reason or to state the physical cause of the fact that production costs would exceed gross revenue. He relies too upon the use of the same expression, namely “give reasons”, in both Article XIX.3 and Article XXI.6. He submits that the same expression used in the same contract should be given the same meaning. However, the judge held that each expression should be construed in its context and that, although the expression was the same, the two contexts were different. He concluded that the parties were likely to have thought that it was sufficient for the seller to state the reasons in a notice clause much more concisely than an expert would be likely to state them in an expert determination.
In my opinion, the judge was right so to hold. Indeed, a comparison of the terms of Article XIX and the terms of Article XXI shows that there is a stark contrast between them. This can be seen in particular from Article XXI.3, 5 and 6 which I have quoted. It can be seen that those provisions are much more detailed than the provisions of Article XIX. The parties are entitled to make detailed submissions to the expert or experts, who are bound to be provided with considerable detail. In these circumstances, I would expect the expert or experts to give detailed reasons.
In short, the contexts of Article XIX on the one hand and of Article XXI on the other are quite different. The judge thought that the sellers’ construction made sense on the basis that the notice required the reason or reasons to be concisely stated and that the parties were most unlikely to have required anything more, if only to avoid a satellite dispute as indeed has occurred here as to the validity of the notice. BGTL says by contrast that in order to decide whether to accept the termination of the agreement, it needs to know what the sellers believed the gross revenue and the production costs to be. In the absence of such information it cannot be expected to decide whether to serve a notice of objection under Article XIX.4. Mr McCaughran submits that the purpose of Article XIX.3 and XIX.4 read together was that the sellers should be provided with sufficient information to enable them to decide whether the projected production costs would indeed exceed the projected gross revenue. He submits that the scheme of the contract was that BGTL would then have six months to consider the information before having to serve a notice of objection under Article XIX.4. He draws attention in particular to the fact that by contrast with Article XIX.3, XIX.4 does not require reasons to be given.
There is undoubtedly force in those submissions. However, as Keene LJ observed in the course of the argument, if the parties had intended to require the notice to contain particulars of the projected production costs and gross revenue, they could easily have so provided. In the absence of a precise provision as to how much detail was to be included in the notice, it is not easy to determine how full the particulars would have to be. Would a single figure for projected gross revenue and a single figure for projected production costs be sufficient? Or would BGTL say, “We cannot decide whether to serve a notice of objection without a detailed breakdown of the figures”? If it were given a detailed breakdown of the figures, would it be sufficiently detailed? Further, on BGTL’s case, it would presumably be necessary, in a case like this where the sellers rely upon projected further natural decline in pressure, for the notice to contain details of the actual pressure and the projected actual pressure.
These problems were, to my mind, highlighted by the argument this morning. Mr McCaughran drew our attention to part of the second witness statement of Mr Norman Wilson of BGTL. He said this:
“19. I would have expected the Sellers to provide sufficient material to enable BGTL to form a view on the assertion that continued production would no longer be Economic. This need not necessarily be a full line by line analysis of the financial schedules to which Mr Sanders refers (although in my opinion such information will need to be provided in an Expert determination if BGTL’s challenge to the validity of the notices is unsuccessful). However, it would include the assumptions and the basic analyses/figures which formed part of the Sellers’ reasoning and led it to its conclusion. This analysis could be expected to be easily at hand for the Sellers because, as explained by Mr Sanders in paragraph 35 of his Witness Statement, it is necessary for the Sellers to conduct such an analysis in order to work out whether the position has been reached. Furthermore, such analysis would no doubt be included in the analysis of the reasons for seeking to terminate the Principal Agreements presented to management in Perenco and then presented by Perenco as Operator to Amerada.
20. It is not correct to say that BGTL could form an accurate view of the level of Production Costs for these fields on the basis of its own experience, publicly available information or with the assistance of an external consultant. The estimate of production costs can vary widely and, without detailed information from the operator of a field, a third party will find it extremely difficult to ascertain with any precision what those costs are”.
Thus on BGTL’s case, the sellers would have to set out the assumptions made and the basic analyses and figures which formed part of the sellers’ reasoning and led to their conclusion. As the definition of production costs in Article XIX.2, which I quoted earlier, shows, that would be a complex operation. It would give BGTL every opportunity to say that it was not sufficient and that in consequence, the notice was not valid. In short, it can readily be seen that there would be considerable scope for dispute as to the validity of the notice. I agree with the judge that the parties would be most unlikely to have intended to create a satellite debate of that kind.
In all the circumstances I do not think that the sellers’ construction, which to my mind was accepted by the judge, creates any real difficulty for BGTL. It will inevitably have considerable information as to the historical decline in pressure and as to gross revenue, and it must know a good deal about production costs. It seems to me to be likely to have enough information to enable it to decide whether or not to serve a notice objecting to termination. However, whether that is so or not, as Jacob LJ said in the course of the argument, it makes no commercial sense to suppose that the parties were not in close contact with each other. On the judge’s construction, although in order to be valid a notice does not have to set out the sellers’ reasons in detail, BGTL has six months before it has to serve notice of objection and can use those six months to request information from the sellers in order to reach a negotiated settlement. The sellers can no doubt in theory refuse to provide information, although there seems little if any point because BGTL can at any time serve a notice under Article XIX.4 and trigger the expert procedure. The seller will then in practice have to provide detailed information.
It seems likely to me that the parties, in entering into the contract, contemplated that once the notice was served giving a reason why the sellers believed that the costs of production would exceed gross revenue, namely in this case as a consequence of the continued fall in pressure, BGTL would ask and, ordinarily at least, obtain relevant information. If the sellers acted unreasonably in this period, and thus exposed BGTL to unreasonable costs in connection with later expert procedure, the experts would have express power under Article XXI.9 to apportion the costs accordingly. In the event, BGTL gave a notice under Article XIX.4. The next step is therefore the expert procedure, in connection with which all relevant information will in practice be available and the detailed provisions of Article XXI will be operated. While the costs of such a procedure are no doubt not insignificant, they cannot amount to very much in comparison with the gross revenue which we were told is estimated at over £41 million in the year 2007 to 2008.
In short, in my opinion the judge’s conclusion is consistent, both with the language used and with the sensible operation of the contact. If the parties had wanted to require further and better particulars of the reasons in the notice, they could and would have so provided. I agree with the judge that they did not.
I only add by way of postscript that I do not think that either Article XIX.2(a)(i)(c), or indeed the new provision in the Inde contract, is of any real assistance in construing Article XIX.3 of the two contracts, especially since the additional clause in the Inde contract was not added to the other contract. For the reasons which I have tried to give, with apologies for their length, the judge was right.
I would therefore dismiss the appeal.
LORD JUSTICE KEENE:
I agree.
LORD JUSTICE JACOB:
I also agree.
Order: Appeal dismissed.