Gas sales agreements: sole remedy for failure to deliver

The English Commercial Court has recently considered the effect of a "sole remedy" clause for under-delivery in a gas sales agreement, and the interplay with a common law claim for damages.

Overview

In Scottish Power UK Plc -v- BP Exploration Operating Company Ltd & Others,¹ the English Commercial Court considered the interpretation of several long-term gas sales agreements (GSAs) with identical terms. Under these GSAs, BP, Talisman Sinopec, Eni and JX Nippon (the Sellers) sold natural gas to Scottish Power (the Buyer) from the Andrew Field in the North Sea.

One of the key issues was whether a clause that provided a specified remedy for under-delivery of gas was a sole and exclusive remedy, not only for breach of the Sellers' duty to deliver natural gas, but also for breach of the Sellers' obligation in the GSAs to provide, install, repair, maintain and operate the Sellers' Facilities. If it was not, the Buyer could claim damages calculated in accordance with the normal measure under common law, in particular by reference to the difference between the contract price and the market price for the gas.

The dispute

Under the GSAs, the Sellers were obliged to deliver gas to the Buyer from the Andrew Field for so long as it was economic for them to produce gas from the field. However, between May 2011 and December 2014, the production platform was shut down to allow various works to be carried out. This disrupted gas deliveries. The Buyer continued to make nominations for gas deliveries each week during the period of shutdown.

The Buyer claimed damages from the Sellers for the shutdown. However, it did not allege that the Sellers breached their duty to deliver. It alleged that the Sellers had breached their duty to maintain and operate the Sellers' facilities, as set out in Article 7.1 of the GSAs. It also alleged that the clause which provided a sole remedy for under-delivery of natural gas (Article 16) did not apply to a breach of Article 7.1.

Article 16 stated that where there was an underdelivery, the Buyer would be entitled to receive natural gas subsequently at a discounted price (Default Gas), in compensation. Article 16.6 provided that this was "in full satisfaction and discharge of all rights, remedies and claims howsoever arising … in respect of under-deliveries by the Seller under this Agreement".

The key issue was therefore whether the claim for damages for breach of Article 7.1 was a claim "in respect of" an under-delivery.

Judgment

Mr Justice Legatt found in favour of the Sellers. The Buyer's only remedy for breach of Article 7.1 in these circumstances was the remedy set out in Article 16. This was not to say that Article 16 provided the remedy for all breaches of Article 7.1, but where a breach of Article 7.1 caused loss by way of an underdelivery, Article 16 applied. Mr Justice Legatt therefore held on the facts of the case that the Buyer's claim was a claim "in respect of" an under-delivery.²

The following points in the judgment are worth noting:

• The wording "all rights, remedies and claims howsoever arising" did not mean that Article 16.6 would automatically apply to all claims where the relevant breach of the GSA also resulted in an under-delivery. If neither (a) the breach which has given rise to the claim, nor (b) the loss for which a remedy is claimed, depended upon the fact that there has been an under-delivery, then Mr Justice Legatt was of the view that the claim would not be "in respect of" an under-delivery.
• It was significant that the GSAs required the Buyer to make daily nominations for gas delivery, irrespective of whether the Sellers were able to deliver such gas, and that Default Gas be calculated in relation to under-deliveries throughout the period of the shutdown. Since the Buyer could not opt out of this process, it was improbable that the parties intended that, where the Buyer automatically received Default Gas, the Buyer was also free to pursue a claim for another remedy for the same failure to deliver gas.
• However, a different result could arise if the Buyer had "unfettered freedom" to nominate gas. In such a situation, Mr Justice Legatt considered it arguable that the Buyer could make a tactical decision to make no nominations at all, meaning there would be no under-delivery under the GSA and the Buyer would not automatically receive Default Gas. The Buyer could then claim for common law damages, which would include the additional cost of replacement gas which the Buyer had purchased from alternative sources at the market price.
• The judge made it clear that he had not overlooked the presumption that parties do not intend to abandon remedies that arise by operation of law, but stated that he considered "that the presumption must be less strong where the common law remedy [here, damages] is not simply excluded but is replaced by a different (and valuable) contractual one" (i.e. to receive Default Gas).

Comment

In this case, the Commercial Court sought to apply an interpretation which reflected the scheme and commercial purposes of Article 16 in the context of long-term GSAs. As such, the judgment (which is currently being appealed) sets out some helpful guidelines and practical takeaways on how similar clauses in a GSA may be interpreted in future:

• It is common for GSAs to contain a sole remedy framework for failure to deliver, which is different from the general measure of damages at law; for example, through the application of discounts on future gas deliveries, agreed caps on damages, or additional gas deliveries.
• There is good commercial rationale for applying a "sole remedy" provision to breaches of the GSA which cause loss by way of a failure to deliver gas, even where the immediate cause of action for the relevant breach may not necessarily require proof of a gas under-delivery. GSAs often impose obligations on the seller which could fall into this category; for example, obligations to allocate capacity in a certain manner, to deliver gas within certain specifications, and to apply gas nominations in a particular priority.
• An overly wide interpretation of the sole remedy clause for failure to deliver gas ought to be rejected, because a breach of a GSA could result in losses in addition to those which relate to underdelivery of gas. For example, delivery of offspecification gas by a seller might result in an under-delivery, but there is often also a separate contractual remedy regime that applies to compensate a buyer for gas treatment and potential damage to its facilities.
• Gas sellers may wish to specify in GSAs an express requirement on the buyer to make gas nominations within a specified period, as well as a deemed nomination regime for where the buyer fails to make such nominations. If not, the buyer may be able to circumvent the specified contractual remedies for failure to deliver to its advantage. Such clauses are relatively common and provide operational efficacy for the parties.

_Notes

_{¹ [2015] EWHC 2658 (Comm).
² There may be further developments on the matter as the judgment is currently the subject of an appeal.}