Judgment - Total Gas Marketing Limited v. ARCO British Limited and Others  continued

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      In this context Your Lordships have been referred to the discussion in Chitty on Contracts, 27 ed., (1994) chapter 12, pp. 570-573 as to the difference between promissory conditions and contingent conditions. Mr. Pollock Q.C. relies in particular on the passage in paragraphs to 12-025 where breach of a promissory condition by one party, which gives the other party the opportunity to treat himself as discharged from further performance of the contract:

     "must be carefully distinguished from that of a 'contingent' condition, i.e. a provision that on the happening of some uncertain event an obligation shall come into force, or that an obligation shall not come into force until such an event happens. In this latter case, the non-fulfilment of the condition gives no right of action for breach; it simply suspends the obligations of one or both parties."

      In paragraph 12-026 it is said, as an example of a condition precedent that:

     "the parties may enter into an immediate binding contract, but subject to a condition, which suspends all or some of the obligations of one or both parties pending fulfilment of the condition."

      On the other hand at paragraph 12-028:

     "The obligations of one or both parties may be made subject to a condition that it is to be immediately binding, but if certain facts are ascertained to exist or upon which the occurrence or non-occurrence of some further event, then either the contract is to cease to bind or one or both parties are to have the right to avoid the contract or bring it to an end."

      I agree with Mr. Pollock that is important to keep promissory and contingent conditions separate but in my opinion there is a common factor. If the provision in an agreement is of fundamental importance then the result either of a failure to perform it (if it is promissory) or of the event not happening or the act not being done (if it is a contingent condition or a condition precedent or a condition subsequent) may be that the contract either never comes into being or terminates. That may be so, whether the parties expressly say so or not. Wickman Machine Tool Sales Ltd. v. L. Schuler A.G. [1974] A.C. 235, 262G per Lord Wilberforce. To adapt the words of Maugham J. in In re Sandwell Park Colliery Company: Field v. The Company [1929] 1 Ch. 277, 282 "the very existence of the mutual obligations is dependent on the performance of the condition." For completeness I would substitute "performance or fulfilment of the condition" for "performance of the condition."

      I do not, therefore, accept Mr. Pollock's argument that the effect of the failure of an event upon which further performance depends can only lead to the suspension of the party's obligation under the contract. In my opinion it depends on the proper construction of the contract as to whether on the non-happening of the event the parties' obligations are suspended or whether the contract ceases to bind. For the reasons given by Peter Gibson L.J. I do not consider that the three cases relied on by the appellants (Charles H. Windshuegl Ltd. v. Alexander Pickering & Co. Ltd. (1950) 84 Ll.L.Rep. 89, Smallman v. Smallman [1972] Fam. 25 and De Oleaga & Co. v. West Cumberland Iron and Steel Co. (1879) 4 Q.B.D. 472) lead to the conclusion that the only effect of the breach of such a condition can be the suspension of the parties' obligations.

      I agree with Mr. Pollock that the condition referred to in the Letter Agreement and in the Draft Agreement is not a promissory condition in the sense referred to by Chitty. There is no question therefore of a breach by ARCO being treated by Total as discharging Total from its further obligation. It is also clear that entering into the Allocation Agreement was not a condition precedent to the coming into being of the Letter Agreement. That agreement came into being on 15 February 1995 and imposed obligations immediately on both parties to it.

      Is the provision as to entering into the Allocation Agreement a contingent condition?

      It seems to me without any doubt that, in the light of the terms of the contract as a whole, entry into the Allocation Agreement was regarded by the parties as fundamental since without it gas could not flow to the Bacton Delivery Terminal and be supplied to Total. That was the whole purpose of the agreement. The parties called entry into the Allocation Agreement a "condition precedent" and said that the agreement was "conditional" on the Seller becoming a party to the Allocation Agreement. As Lord Reid said in Wickman Machine Tool Sales Ltd. v. L. Schuler A.G. [1974] A.C. 235, 251 in seeking to discover intention as disclosed by the contract as a whole "Use of the word 'condition' is an indication--even a strong indication--of such an intention but it is by no means conclusive." It is a strong indication here. Clause 2.8.1 in the present agreement is, moreover, the only clause which specifies matters on which the agreement is "conditional" and which are said to be "conditions precedent." In my opinion Clause 2.8.1 plainly makes entry into the Allocation Agreement a contingent condition or a condition precedent to the obligation to deliver and take quantities of gas under the agreement.

      On this basis the issue between the parties is thus a narrow one, though, as the division of opinion in the courts below shows, not an easy one -viz since it was clear that the parties intended nomination of quantities of gas to be made and nominated quantities of gas to be delivered with effect from the First Delivery Date, did the failure to enter into the Allocation Agreement mean that Total was no longer bound by the agreement; or did it mean that the obligations in relation to delivery and acceptance were suspended until ARCO did subsequently enter into the Allocation Agreement so long as it did so within the period found by Your Lordships to be an appropriate period.

      There are pointers both ways. In favour of "suspension" Mr. Pollock has argued that a seller would not enter into a contract involving this massive investment unless he could be satisfied that he had a long-term contract assuring a predictable return on his investment in the development of the field, particularly since it was anticipated that the depletion of the Trent field would take some 14 years. It is only if the commercial purpose of the contract became frustrated that the parties would envisage termination other than pursuant to specific clauses of the agreement. Here there are provisions for termination--e.g. if the consents and approvals are not obtained by 1 March 1996 (Clause 2.8.2); by the buyer if deliveries are not made for twelve months (Clause 2.7.2) unless by reason of force majeure when either party may determine if the deliveries are not made for 18 months (Clause 14.6)--but there is not any provision for termination if the Allocation Agreement is not entered into in Clause 2.8.2 or elsewhere. There was evidence before Jonathan Parker J that it commonly occurred that allocation agreements were completed just before the first gas is delivered. This indicates, it is said, that the parties would be unlikely to consider that the whole contract was off if the Allocation Agreement was not completed by the chosen First Delivery Date. Moreover the provision for Default gas and substitution gas, for flexibility in nominating the Daily Contract Quantity, subject to the Annual Contract Quantities established, and the fact that under the Letter Agreement the First Contract Year may, depending on the choice of the seller begin at any time between 15 September and 15 December 1996 all indicate some flexibility and recognise that there may be some slippage in performance of the contract once the contractual obligation has come into being. All these points have been developed by Mr. Pollock Q.C. in seeking to lead to ARCO's primary case that a reasonable period of one year from the end of the period within which the First Delivery Date must fall should be allowed for ARCO to complete the Allocation Agreement without the contract coming to an end. From a commercial point of view there is obviously much force in many of these points.

      The flaw in ARCO's argument, however, it seems to me at the end of the day is that it does not give sufficient emphasis to the importance of the First Delivery Date in the scheme agreed to by the parties. To ARCO before the judge this was a mere "target date;" before your Lordships it is said to be no more than the "starting point . . . for the fourteen year period during which gas is to be supplied under the contract." Contrary to this submission, but in agreement with the three members of the Court of Appeal I consider, to use the words of Otton L.J., that ". . . the First Delivery Date . . . once determined . . . is central to the intended operation of the agreement between the parties."

      That is the date fixed by ARCO (not less than 18 but up to 21 months after the signing of the contract) on and from which natural gas from Trent is first to be delivered to Total in accordance with the terms of the agreement. Whichever date is fixed between 15 September and 15 December 1996 establishes the beginning of the First Contract Year. It terminates the period in which modifications of the Delivery Facilities are taken into account for the purposes of Clause 2.8.1(ii); it fixes the period during which ARCO may deliver commissioning gas to test and commission the Delivery Facilities (Clause 2.9(i)); it fixes the period during which Total shall give notice to ARCO of the quantities of gas required (Clause 6.5 (b)). It fixes the months in which ARCO is to begin to render a statement to Total of Total's nominations for the preceding month (Clause 10.1). The contract provides for the parties' rights and remedies in relation to delivery and receipt of gas to begin from that date. There is no provision, once the First Delivery Date has been fixed, for it to be altered and neither side suggests that it can be altered. It is thus the date which once fixed is certain and from which the parties can begin to achieve the essential purpose of the agreement.

      If the Allocation Agreement has not been entered into by that date then the gas cannot flow and it is to be noted that ARCO had not only twelve months from the signing of the Letter Agreement to 1 March 1996 to use its reasonable endeavours to complete the Allocation Agreement, but also a further period of between six-and-a-half and nine-and-a-half months (to be decided by ARCO in its entire discretion) before the gas was to flow. It is impossible to think that ARCO would not have had the First Delivery Date in mind when negotiating to enter into the Allocation Agreement, and conversely that on 28 August 1996 in fixing the First Delivery Date as the last day of the period of one month which it had chosen previously that ARCO did not have the need to complete the Allocation Agreement in mind. Even ARCO accepts that from the First Delivery Date, if there is no Allocation Agreement, the parties' rights are affected. ARCO says that they are merely suspended, though there is no mention in the agreement of the suspension of obligations or rights and nothing to indicate what terms are to apply during the period of the suspension. Since the First Delivery Date remains fixed, so that all the various notices have to be given in periods fixed by that date under the terms of the agreement, these notices may be wholly impracticable if the delivery of gas is not to begin until the Allocation Agreement is made at a later date.

      As the delivery of gas is dependent on the making of the Allocation Agreement it seems to me not surprising that the parties should have provided in Clause 2.8 that "this Agreement is conditional on . . . (iii) the Seller becoming party to the Allocation Agreement." That seems to me to mean that if this condition is not fulfilled the agreement comes to an end.

      But by when must the condition be fulfilled? It seems to me that the natural meaning of the clause is that it must be fulfilled in order to allow the First Delivery Date to be put into effect and that if looked at at the date of the contract (15 February 1995) that is what the parties would be likely to have said in the context of the scheme which they had set up.

      I am not persuaded that any of the other times suggested is preferable or commercially more sensible. True a later date would have given ARCO more time and the Allocation Agreement would soon have been completed in fact. I reject, as did all the members of the Court of Appeal, ARCO's primary case that this agreement should be suspended for not less than one year from 15 December 1996. To keep Total tied and in doubt for such a long period seems to me to be wholly unreasonable. Contrary to ARCO's submission I consider that Clause 2.8 is not there just to protect ARCO in case it is unable to deliver because other parties prevent the completion of the Allocation Agreement. It was there also to protect Total from being uncertain as to when deliveries would begin, thereby making difficult its own arrangements for fulfilling onward contracts of sale--a problem rightly acknowledged by ARCO in its letter to Total of 30 October 1996 even if in respect of a short period. There ARCO say "We recognise the uncertainty this may cause the Buyer in predicting physical delivery of gas and the Sellers are still prepared to remove the uncertainty by agreeing late startup provisions, if you so desire." How much greater would have been the uncertainty if Total thought it was bound to wait for more than twelve months from the First Delivery Date or from 15 December 1996.

      Nor do I think that Clause 2.7.2, which entitles Total to determine the agreement only after ARCO has defaulted on deliveries for 12 months, is of assistance. That clause in my opinion is dealing with a situation where the gas could flow because there is an Allocation Agreement and the First Delivery Date has passed but gas has not been delivered. It does not mean that the Seller should have 12 months to make the Allocation Agreement.

      For similar reasons I do not accept ARCO's third choice, that which appealed to Nourse L.J., i.e. "such period after the First Delivery Date as was reasonably required for it to be ascertained whether the Allocation Agreement would be concluded or not." That seems to me to leave matters in too much doubt and it might be difficult to operate and might well mean in practice that the date by which the condition was to be fulfilled became the date when it was in fact fulfilled. If that were intended the parties could just as well have said that the First Delivery Date shall be a specified date after the date when the Allocation Agreement has been entered into.

      Moreover it, like the other two suggested alternatives, leaves the condition to be satisfied after the First Delivery Date, which seems to me to be contrary to the intention of the parties deduced from a consideration of the contract as a whole. It is difficult to see why, if the reasonable period is to be assessed at the date of the contract (as I think it should see Re Longlands Farm, Alford v. Superior Developments Ltd. [1968] 3 All E.R. 552, it should be necessary to fix any time after the First Delivery Date.

      That leaves ARCO's second choice, 15 December 1996. That has the merit of some certainty since it was the last date on which the First Delivery Date could fall and it was the date to be taken if ARCO failed to give the necessary notices. But it seems to me artificial to take that date. In the first place it ceases to be a relevant date either as the potential end of the period or as the "default date" once the First Delivery Date has been nominated. In the second place the First Delivery Date was chosen in its discretion by the Seller and it seems to me that it would be strange to give ARCO more time within the overall period once it had fixed the date.

      Thus independent of authority I arrive at the conclusion that the appropriate date is the first Delivery Date. The choice of the First Delivery Date is however, in my view consistent with the approach of the court in three cases relied on by Mr. Kentridge Q.C. Those cases are concerned it is true with the sale of land but it seems to me that the principle established is applicable mutatis mutandis to other contracts. Like Peter Gibson L.J. and with respect to some expressions of opinion to the contrary in Perri v. Coolangatta Investments PTY Ltd. (1982) 149 C.L.R. 537 I do not accept that they have no relevance to a contract of the present kind for the supply of goods even though it is a long-term instalment contract. Thus is Smith v. Butler [1900] 1 Q.B. 694 where a contract for the sale of land was conditional on the mortgagee consenting to the transfer of a loan to the plaintiff Romer L.J. said at page 699 "to my mind it is reasonably clear that the vendor has until the time fixed for completion, or, if no time for completion is fixed, then a reasonable time, in which to procure the assent of the mortgagee to the acceptance of the purchaser as mortgagor".

      In Aberfoyle Plantations Ltd. v. Khaw Bian Cheng [1960] A.C. 115 (P.C) Lord Jenkins having referred to Smith v. Butler and to In re Sandwell Park, Colliery Company (supra) said:

     "Before parting with these two authorities their Lordships would observe that the reason for taking the date fixed for completion by a conditional contract of sale as the date by which the condition is to be fulfilled appears to their Lordships to be that until the condition is fulfilled there is no contract of sale to be completed, and accordingly, that by fixing a date for completion the parties must by implication be regarded as having agreed that the contract must have become absolute through performance of the condition by that date at latest."

      Mr. Kentridge Q.C. has submitted in addition that a number of clauses would be quite unworkable unless the First Delivery Date is taken. Mr. Pollock totally rejects that contention. It seems to me that some of the clauses would be more difficult to operate but in view of the conclusion I have reached I do not think that it is necessary to decide whether they would be unworkable.

      It is said to be unreasonable that the contract terminated on the First Delivery Date when ARCO was, it asserts but Total does not accept, able to enter into the Allocation Agreement a few days later, the answer is that exactly the same thing could happen if 15 December 1996 were taken as the dates determining the reasonable period for ARCO for comply with the condition. It might still need a few extra days. Mr. Pollock says that courts should be slow to produce an absurd result. I do not consider that to read this condition as meaning that if it is not complied with contractual obligations come to an end produces an absurd result. In the present case it seems to me that Total just as well as ARCO can argue that the result for which they contend is one which will be commercially justified.

      Accordingly as a matter of the construction of this contract I hold that the time for the fulfilment of the condition precedent, i.e. entering into the Allocation Agreement by ARCO, was the First Delivery Date fixed by ARCO itself. In the circumstances since that condition was not fulfilled Total was no longer bound by the agreement.

      I would therefore dismiss the appeal.


My Lords,

      I have had the advantage of reading in draft the speech prepared my noble and learned friend Lord Slynn of Hadley. For the reasons which he gives I too would dismiss the appeal.


My Lords,

      The central question is whether on a correct construction of a long- term contract for the sale of gas it was discharged by reason of the non-occurrence of a condition. It is a contract of a type which is sometimes called a relational contract. But there are no special rules of interpretation applicable to such contracts: see McKendrick, The Regulation of Long Term Contracts in English law, essay in Good Faith and Fault in Contract Law, ed. Beatson and Friedman, 1995, 305. That is not to say that in an appropriate case a court may not take into account that, by reason of the changing conditions affecting such a contract, a flexible approach may best match the reasonable expectations of the parties. But, as in the case of all contracts, loyalty to the contractual text viewed against its relevant contextual background is the first principle of construction.

The Trent Reservoir

      In 1995 Arco British Limited and two other companies were licensees of the gas field known as the Trent Reservoir which is situated in the southern basin of the North Sea. At that stage it was estimated that the economically recoverable gas reserves of the Trent Reservoir would last some 14 years. A platform has been installed at the Trent Reservoir. Gas is transported from the Trent Platform to the Amoco Gas Terminal at Bacton in Norfolk where the "raw" gas is processed. The Bacton Terminal is a multi-user terminal. It is therefore necessary for an owner of gas delivered to the Bacton Terminal, to become a party to the allocation agreement applicable to it. The allocation agreement determines by mathematical formulae how much gas leaving the terminal is to be treated as derived from each of the fields. When the processed gas leaves the terminal it enters the onshore transportation system and is delivered to purchasers of gas.

The context and basic contractual terms of the contracts

      For the three licensees of the Trent Reservoir the conclusion of a long term contract for the sale of gas offered the advantage that the gas would be sold at pre-agreed terms over the life of the field, guaranteeing a minimum level of receipts. For potential purchasers of gas such a contract offered the attraction of security of supply and, among other things, some flexibility through nomination procedures. These are the principal commercial considerations which in February 1995 led to negotiations for a long term contract between the licensee companies and Total Gas Marketing Limited. Those negotiations resulted in the conclusion of three identical contracts between the licensee companies and Total for the sale and purchase of 50 per cent. of the economically recoverable reserves of the gas field. It will be convenient to refer to one contract only. It was structured as a "buyer's nominated" depletion contract. The Buyer is entitled to receive on a daily basis a supply of gas in response to properly made daily nominations during the operation of the contract. The Buyer is obliged to take or pay for an annual minimum quantity of gas. If the Seller fails to deliver the nominated daily quantity, the Buyer is entitled to substantial discounts.