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

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      My Lords, much as I would have wished to uphold this contract if that were possible, for the reasons I have given I am bound to conclude that the appeal of the Seller ought to be dismissed. Subject to disagreeing on the relevance of decisions such as Aberfoyle, I am also in substantial agreement with the reasons given by my noble and learned friend Lord Slynn of Hadley.


My Lords,

      I have had the advantage of reading in draft the speech which has been prepared by my noble and learned friend Lord Slynn of Hadley. For the reasons which he gives I too would dismiss this appeal. I confess however that I have reached this conclusion with regret. It seems to me most unlikely that the parties to this agreement intended that it should be capable of being terminated by reason only of the non-fulfilment of the condition about the Allocation Agreement once the so-called funnelling mechanism in clause 2.1 had been put into effect by the Seller to identify the First Delivery Date.

      This was a commercial contract which, to the knowledge of both parties, was bound to involve the Seller in a good deal of preliminary expenditure in order to provide the facilities which were needed to deliver the gas which was to be supplied to the Buyer. Their bargain was struck against the background of a market for gas which had proved in the past to be extremely volatile. Substantial changes in the open market price of this commodity would be bound to affect the value of the investment by either party in the transaction. One of the purposes of an agreement of this kind is to eliminate the risk of having to carry the burden of such price changes. It is no secret that the reason why the Buyer wishes to terminate the agreement is that the market has now turned in its favour. It can obtain gas elsewhere more cheaply than it would have been required to take gas from the Trent Reservoir under the agreement. No doubt it will seek to renegotiate a fresh bargain with the Seller for the supply of the Trent gas at a more favourable price. The Buyer is not to be criticised if the wording of the agreement permits this course. But the court should be slow to lend its assistance. Commercial contracts should so far as possible be upheld. That is especially so where the party who seeks to preserve the contract has incurred expenditure after it was entered into with a view to performing it in the future over a period of many years. Almost every commercial enterprise depends upon the investment of capital with the expectation of profit in return. Long term commercial contracts are made in order to protect the value of the investment. It is disappointing to find that in this case it has not been possible to construe the agreement in such a way as to provide the Seller with the protection which it was designed to achieve.

      From time to time in the course of the argument both in the courts below and in your Lordships House it has been suggested on the Seller's behalf that clause 2.8.2(c) was inserted into the agreement solely for its benefit. If that were so, it would have led inevitably to the dismissal of this action by the Buyer. It would have been open to the Seller to waive the condition at any time and to insist upon performance of the contract: Hawksley v. Outram [1892] 3 Ch 359. But, as Brightman J. pointed out in Heron Garage Properties Ltd v. Moss [1974] 1 W.L.R. 148, 153G-H, the answer to the question whether a stipulation is for the exclusive benefit of the party who seeks to waive it must be found upon the face of the contract. It is a question of construction.

      In the present case it seemed to me, at one stage, that there were indications within the wording of the agreement that clause 2.8.2(c) was of this character. The differences between the treatment in clause 2.8.2 of the other two conditions precedent and its treatment of the condition about the Allocation Agreement must be taken to have been deliberate. The Seller was required to use its best endeavours to ensure that all three conditions were satisfied by 1 March 1996. The explanation for the choice of that date for all three conditions lies in clause 2.1, because the first step to identify the First Delivery Date had to be taken on or before that date. A relatively narrow window within which that date had to lie was laid down by that clause, no doubt for good commercial reasons as the parties could not afford to keep the matter in suspense indefinitely. But as to what was to happen after 1 March 1996 the three conditions were treated differently. Both parties were to be entitled to terminate the agreement at any time if one or other or both of the first two conditions were not satisfied. The clause is silent as to what the position was to be in regard to condition (c).

      As to reason for this silence, the answer seemed to me to lie in the difference which clause 2.8.2 itself recognises between the consents and approvals to which the other two conditions refer and the Allocation Agreement which is the subject of clause 2.8.2(c). The consents and approvals had to be obtained from the Secretary of State and other agencies such as the Health and Safety Executive. It was uncertain at the date of entering into the agreement whether, and if so when, they would be available. The Allocation Agreement was a matter for negotiation on commercial terms with the other users of the Seller's facilities. Unlike the consents and approvals, it was something which was to bargained for. The Seller was protected by an express provision in the best endeavours clause against having to enter into such an agreement by 1 March 1996 upon terms which were unreasonable. But in the end of the day it would have had to become party to an allocation agreement at whatever price and on whatever conditions, however onerous, if it was to be able to supply gas to the Buyer from the Trent Reservoir. It might be thought that the Buyer had no need of protection against difficulty in obtaining an allocation agreement on terms which were not unduly onerous, as the whole expense of it was to rest the Seller and not on the Buyer. All the Buyer had to do was to insist upon the performance of the contract, which provided all that was needed for its protection once the First Delivery Date had been identified. It was the Seller who was in need of a provision in the agreement which would protect it in the event of such a difficulty.

      These arguments were in need of careful scrutiny before they could be accepted as providing an answer in the Seller's favour in this case. No doubt for very good reasons, they were not developed by Mr. Pollock in the course of his address. So I do not wish to say any more about them. The fact that I have mentioned them at all is due solely to my unease that the way in which we have had to dispose of this appeal may be at odds with the commercial purpose of the agreement.


My Lords,

      In the Agreement between the appellant ("Arco") and the respondent ("Total") Clause 2.8.1 provides:

     "This Agreement is conditional on:

     (iii)  the Seller becoming party to the Allocation Agreement."

      The issue arising in this appeal is whether the non-fulfilment of the condition set out in Clause 2.8.1(iii) by 31 October 1996, which was the First Delivery Date under the Agreement, operated to terminate the Agreement on that date or whether the non- fulfilment by that date operated only to suspend the obligations under the Agreement.

      The relevant terms of the Agreement and the background to it have been set out in the speeches of my noble and learned friends, Lord Slynn of Hadley and Lord Steyn, and I refer only to two aspects of the Agreement which I consider to be of particular relevance and which are noted by Peter Gibson L.J. in his judgment. The first is that the Agreement envisages two periods within the course of its operation. The first period is from the date on which the Agreement is made until the First Delivery Date, during which period the contractual obligations of Arco are largely geared to ensuring that there would be a supply of gas from the First Delivery Date. The second period is from the First Delivery Date when the supply of gas will commence until the termination of the Agreement. The second aspect of particular significance is that the First Delivery Date is a date of great contractual importance, because from that date the supply of gas, which is the whole purpose of the contract, is to commence.

      As has been observed in the authorities, the word "condition" or "conditional" and the words "condition precedent" are used in contracts with different meanings. It was common case that the condition contained in Clause 2.8.1(iii) and described in the Letter Agreement as "a condition precedent" was not a condition precedent in the sense that no contract came into existence between Arco and Total until the condition was fulfilled. It was accepted that a contract did come into existence between the parties on 15 February 1995 under which both parties assumed certain obligations to be carried out before the First Delivery Date when the principal obligations arose.

      It was not in dispute between the parties that the non-fulfilment of the condition specified in Clause 2.8.1(iii) by the First Delivery Date, 31 October 1996, had an effect on the obligations imposed on the parties by the Agreement. The submission of Total was that the non-fulfilment of the condition by that date operated to terminate the Agreement. In its written case Total submitted that it was immaterial whether the condition was classified as a condition precedent to the continuation of the Agreement or as a condition subsequent to the Agreement. I consider that this latter submission is correct. In Perri v. Coolangatta Investments Pty. Ltd. [1982] 149 C.L.R. 537, 541 and 543 Gibbs C.J. stated:

     "However, provided that the effect of the condition is clearly understood, its classification may be merely a matter of words . . . it probably does not matter in the present case whether the condition is described as 'precedent' or 'subsequent', provided that it is understood that its non-fulfilment did not prevent a binding contract from coming into existence but did have the effect that the respondent was under no obligation to complete the sale unless the condition was fulfilled or waived."

      Devlin J. expressed a similar opinion in Charles H Windschuegl Ltd. v. Alexander Pickering & Co. Ltd. (1950) 84 Ll.L.Rep. 89, 92:

     "Whether it is regarded as a condition precedent, or condition subsequent, does not matter very much, I think, as a matter of law or as a matter of business."

      Before your Lordships both parties debated the issue which arose by regarding the condition set out in Clause 2.8.1(iii) as a condition precedent rather than as a condition subsequent.

      A further point which arose in the course of the submissions related to the case made by Total before the High Court and the Court of Appeal that the non-fulfilment of the condition by the First Delivery Date operated automatically to terminate the Agreement. Before your Lordships Mr. Kentridge Q.C., for Total, accepted that there was no material distinction between automatic termination of the Agreement on non-fulfilment of the condition and the election by Total to treat the Agreement as terminated on non-fulfilment, because if non- fulfilment did operate automatically to terminate the Agreement, but Total with the agreement of Arco wished the Agreement to continue, the parties would simply agree to treat the Agreement as still continuing. I consider that the acceptance of this point does not affect Total's case.

      The submission of Arco was that the non-fulfilment of the condition by the First Delivery Date only suspended the obligations of Arco under the Agreement, and Arco submitted that the Agreement would eventually be terminated if there was such delay after the First Delivery Date in Arco entering into the Allocation Agreement that the commercial purpose of the Agreement would be frustrated. Arco further submitted that such frustration would not occur until a substantial period had elapsed after 31 October 1996.

      Therefore two issues arise for determination from these conflicting submissions. The issues are closely interwoven and, although capable of being stated separately, cannot be considered in isolation. One issue is whether non-fulfilment of the condition operated to terminate the Agreement or only to suspend it. The other issue is, if non-fulfilment of the condition operated to terminate the Agreement and not merely to suspend it, by what date was the condition to be fulfilled.

      It was submitted on behalf of Arco that the parties had entered into the Agreement as a long-term contract, that before the gas could be supplied there was much planning and preparatory work to be carried out involving very large capital expenditure, and that gas was to be supplied under the Agreement for a period estimated to last for about 14 years. It was further submitted that there was no express provision in Clause 2.8. that the Agreement would or could be terminated if Arco had not entered into the Allocation Agreement by the First Delivery Date, which omission was to be contrasted with the provisions in Clause 2.8.2 for termination of the Agreement if the necessary approvals and consents specified in sub-paragraphs (i) and (ii) of Clause 2.8.1 were not obtained by 1 March 1996. The omission of an express provision for termination in respect of Clause 2.8.1(iii) was to be further contrasted with the express provision for termination to be found in Clause 2.7.2 which provided:

     "The Buyer may terminate this Agreement if deliveries of Natural Gas have not been made by the Seller for a continuous period of twelve (12) months other than as a result of an event (or events) of Force Majeure."

      Therefore it was clear that if, after the supply of gas had commenced, Arco then failed to deliver gas, Total would not be entitled to terminate the Agreement unless failure to deliver lasted for a continuous period of 12 months. Clause 14.6 also provided that either party might terminate the Agreement if Force Majeure prevented the delivery of gas for a period in excess of eighteen months.

      Arco further relied on the evidence that it was a frequent occurrence that Allocation Agreements (which are dependent upon the agreement of third parties with the seller) are often not concluded until shortly before the gas supply from the delivery terminal commences. Arco also advanced the point that the effect on the parties of termination of the Agreement because of the failure to enter into the Allocation Agreement by the First Delivery Date could not be foreseen when the Agreement was made, as whether it would be for the advantage of the seller or the buyer for the Agreement to terminate would depend on the state of the market at the First Delivery Date.

      Arco submitted that the meaning and effect to be given to Clause 2.8.1(iii) depended on the intention of the parties, and that having regard to the above factors, a court should not come to the conclusion that the parties had intended that the Agreement would be terminated if Arco had not entered into the Allocation Agreement by the First Delivery Date, but rather should conclude that the parties must have intended that a delay in concluding the Allocation Agreement would not terminate the Agreement but only suspend performance of the obligations under it. Arco further pointed out that what had actually happened was that an Agreement, which it claimed to constitute the Allocation Agreement, had been concluded on 6 November 1996, a mere six days after the First Delivery Date, and argued that the parties could not have intended that a mere six days' delay would terminate the Agreement which was intended to provide for the supply of gas for a period of 14 years.

      My Lords, notwithstanding that there is considerable weight in these points, I am of opinion that non- fulfilment of the condition did operate to terminate the Agreement and not merely to suspend it. In Wickman Machine Tool Sales Ltd. v. L. Schuler A.G. [1974] A.C. 235 this House considered the meaning of the word "condition" in a term of a contract which provided in Clause 7(b):

     "It shall be [a] condition of this agreement that:--

      (i) Sales shall send its representatives to visit the six firms whose names are listed in the Schedule hereto at least once in every week for the purpose of soliciting orders for panel presses."

Lord Reid stated at p. 251C:

     "What is contended is that the terms of clause 7 'sufficiently express an intention' to make any breach, however small, of the obligation to make visits a condition so that any breach shall entitle Schuler to rescind the whole contract if they so desire.

     Schuler maintains that the use of the word 'condition' is in itself enough to establish this intention. No doubt some words used by lawyers do have a rigid inflexible meaning. But we must remember that we are 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.

     The fact that a particular construction leads to a very unreasonable result must be a relevant consideration."

      Mr. Pollock Q.C., for Arco, submitted that the judgments in Wickman Machine Tool Sales Ltd. v. L. Schuler A.G. afford no guidance in the present case because in the Wickman Tools case the condition under consideration was a promissory condition, the non-fulfilment of which constituted a breach of contract, whereas in the present case it was not in dispute that the condition set out in Clause 2.8.1(iii) was not a promissory condition but a contingent condition, the non-fulfilment of which gave rise to no right of action. Mr. Pollock further submitted that the non-fulfilment of a contingent condition did not operate to terminate a contract, but only to suspend the performance of the obligations arising under it, and in support of this submission he relied on the decisions in the cases of De Oleaga & Co. v. West Cumberland Iron and Steel Company (1879) 4 Q.B.D. 472, Windschuegl v. Pickering 84 Ll.L.Rep. 89 and Smallman v. Smallman [1972] Fam. 25.

      I do not accept the submission that because a condition is a contingent condition and not a promissory condition, non-fulfilment merely suspends the performance of obligations under the contract and cannot terminate the contract. In the decision of the High Court of Australia in Perri v. Coolangatta Investments Pty. Ltd. [1982] 149 C.L.R. 537, 546 Gibbs C.J. stated:

     ". . . I consider that when the time has elapsed for performance of a condition which is not a promissory condition, but a condition precedent to the obligation to complete a contract of sale, either party, if not in default, can elect to treat the contract as at an end if the condition has not been fulfilled or waived . . . "

      There are cases where non-fulfilment of a contingent condition will operate only to suspend a contract rather than to terminate it, as in the three cases cited by Mr. Pollock which related to words in a contract and to circumstances which differed greatly from the present case. Whether non-fulfilment will operate to suspend or terminate will depend on the context and setting of the word "condition" or "conditional" in the particular contract. The present contract states that: "This Agreement is conditional on (iii) the Seller becoming party to the Allocation Agreement." The Letter of Agreement expressly refers to the "conditions precedent" detailed in Clause 2.8. These words in the Agreement and the Letter Agreement are, in themselves, more consistent with non- fulfilment operating to terminate the Agreement rather than merely operating to suspend it. The judgments of this House in the Wickman Tool case show that the deliberate use of the word "condition" in a contract, particularly when it is used in only one part of a lengthy agreement containing many provisions, is an indication that non-fulfilment of the condition will terminate the agreement, unless this construction would lead to a very unreasonable result which, in my opinion, would not be the case here. Moreover, as Gibson L.J. observed in his judgment, there is not a word about suspension in this Agreement between Arco and Total.

      In the Wickman Tool case this House was considering a promissory condition, but I consider that the opinions expressed in the judgments also provide guidance when consideration is being given to the effect of the non-fulfilment of a contingent condition, because the word "condition" denotes, as Lord Morris of Borth-y-Gest observed at 258H, "something fundamental to the continued operation of an agreement," and this can be either a promissory condition or a contingent condition.

      Therefore, having concluded that non-fulfilment of the condition in Clause 2.8.1(iii) operated to terminate the Agreement, I turn to consider the issue of the date by which the condition had to be fulfilled. The First Delivery Date was the date on which the performance of the essential obligations of the Agreement was to begin. As Gibson L.J. stated in his judgment, "The First Delivery Date is of crucial importance in the scheme of the agreement", and Otton L.J. stated that "The First Delivery Date, once determined, is central to the intended operation of the agreement between the parties." This leads, in my opinion, to the conclusion that the condition was to be fulfilled by the First Delivery Date, and consequently that its non-fulfilment by that date operated to terminate the Agreement. Whilst the present contract for the supply of gas over a lengthy period differs in many respects from a contract for the sale of land, I consider that Total is entitled to draw an analogy between the First Delivery Date in this Agreement, when performance was to begin, and the date fixed for completion of a sale of land, and to derive support from the judgment of the Privy Council delivered by Lord Jenkins in Aberfoyle Plantations Limited v. Khaw Bian Cheng [1960] A.C. 115, 124:

     "Where a conditional contract of sale fixes a date for the completion of the sale, then the condition must be fulfilled by that date."

      See also per Maugham J. in In re Sandwell Park Colliery Company [1929] 1 Ch. 277-283.

      Arco accepted that at some stage after the First Delivery Date the Agreement would eventually be terminated if Arco was unable to enter into the Allocation Agreement, and Arco's argument was that the termination would be brought about by frustration. In my opinion in this case where the First Delivery Date was of crucial importance and where the parties had expressly made the entry into the Allocation Agreement by Arco a condition of the Agreement, a court should not hold that the Agreement would eventually be terminated by frustration at some date unspecified by the contract subsequent to the First Delivery Date. As Evans J. stated in Nile Co. for the Export of Agricultural Crops v. H & J M Bennett (Commodities) Limited [1986] 1 Lloyd's Rep. 555, 582, referring to an event claimed to frustrate the contract:

     "The . . . question . . . is whether the new situation thus created is within or outside the scope of the contract on its true construction."

      In my opinion the failure to enter into the Allocation Agreement and the situation created by it was within the scope of the contract on its true construction and was governed by Clause 2.8.1(iii).

      If the argument advanced on behalf of Arco were correct, it would mean that the Agreement would be left suspended from the First Delivery Date for a period, the duration of which could not be accurately forecast, with all the uncertainty which this would involve, and I do not consider that the parties who entered into this carefully drafted Agreement intended such a result.

      As regards the period of suspension of the Agreement after 31 October 1996 until the Agreement would be terminated by frustration by reason of Arco not having entered into the Allocation Agreement, Arco submitted that there were three possible periods, and in its written case it stated:

     "Arco's primary case is that there can be no question of termination before 12 months have elapsed from the First Delivery Date. This was accepted by Jonathan Parker J.

     In the alternative, Arco submits that termination cannot arise until 15 December 1996, ie. the last day of the contractual delivery window.

     Nourse L.J. held that a reasonable time for the conclusion of the allocation agreement was such period after the First Delivery Date as was required for it to be ascertained whether the allocation agreement would be concluded or not. If necessary, Arco adopts this as a second alternative."

      In my opinion none of these periods is consistent with the intention of the parties to be derived from the terms of the Agreement. I consider that Arco cannot derive assistance from the provision in Clause 2.7.2 that Total can only terminate the Agreement if deliveries of gas have not been made for a continuous period of 12 months, because that Clause is dealing with the different situation where Arco's obligation to deliver gas had arisen and where Total would be compensated for a failure to deliver under the provisions of Clause 17 of the Agreement relating to Default Gas. Nor can 15 December 1996 be a date on which Arco can rely once it chose to notify Total that The First Delivery Date would be 31 October 1996; on that notification being given 15 December 1996 ceased to be the last day of "the contractual delivery window" and 31 October 1996 became the First Delivery Date under the contract. I further consider that the period suggested by Nourse L.J. in his dissenting judgment, viz. "such a period after the first delivery date as was reasonably required for it to be ascertained whether the allocation agreement would be concluded or not" would give rise to very considerable uncertainty in its operation and that at the time of making the Agreement the parties would not have intended that such uncertainty could arise.

      Accordingly, for the reasons which I have given, I would dismiss this appeal.


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