England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
COMMERCIAL COURT
MR JUSTICE COLMAN

		Royal Courts of Justice The Strand London WC2
		18th November 1997

LORD JUSTICE STAUGHTON: For the reasons that have been handed down this appeal will be allowed.

There are five contracts relating to the sale of natural gas from the Andrew field in the North Sea over a period of 25 years. The Buyer under each contract is the plaintiffs, Scottish Power plc. The Sellers are the five companies which feature as defendants in these proceedings, although in four of the five cases they became parties by novation after the contracts were first concluded on 4th February 1994. There were two supplemental agreements to each contract, both dated 10th July 1996. The terms of all five contracts, as supplemented, were identical save for the proportions of the five sellers in the gas from the Andrew field.

The dispute is whether and to what extent the Sellers are entitled to sell gas from the field to others, and accordingly not to Scottish Power. The Sellers say that they have quite extensive power to do so, under clauses 5.1(10) and 5.1(11) of the contract; the Buyer argues for a much more limited right, under clause 5.1(11) only. The dispute came before Colman J. on an originating summons issued on 18th February 1997. (The hearing was expedited for some reason, as has been the appeal in this court.) Colman J. arrived at a conclusion which gave the Sellers most but not all of what they wanted. Some part of his reasoning was, we are told, not put forward by either side in argument; and is not adopted by either side now.

The structure of the contract

The Buyer contends, and the Sellers dispute, that the contract is an agreement to sell all the natural gas in the Andrew field, subject to some limited exceptions. That accords with recital (3) to the agreement:

"The Seller wishes to sell to the Buyer and the Buyer

wishes to purchase from the Seller, the Seller's Share of Natural Gas produced from the Andrew Field during the Contract Period, upon and subject to the terms and conditions hereinafter appearing."

In the body of the agreement there are these two clauses:

"3.1 Subject to the reservations contained in Clause 5.1 the Seller agrees to sell, tender for delivery and deliver at the Delivery Point and the Buyer agrees to accept and pay for, or, subject to Clause 6.2, if not accepted to pay for (pursuant to Articles 9 and 10), all Natural Gas tendered for delivery by the Seller and produced from the Seller's Interest in the Andrew field, and/or produced by the Seller for delivery to the Buyer by virtue of the rights contained in Clause 5.2 during the Contract Period. The quantities, prices, times and manner in which such Natural Gas shall be sold, tendered for delivery, accepted and/or paid for shall be established under this Agreement."

3.3 The Seller covenants with the Buyer that it will not by virtue of its Seller's Interest produce its entitlement to Natural Gas from the Andrew Field (nor permit such Natural Gas to be so produced) otherwise that for the purposes of deliveries to the Buyer under this Agreement or for the purposes specified in article 5."

One finds at once that the contract is not always drafted with the precision which a lawyer would use. Thus clause 3.1, on a closer look, does not appear to specify any quantity of natural gas which the Seller is obliged to tender, whilst the Buyer is apparently obliged to accept or at any rate pay for all natural gas which the Seller chooses to tender. However, as the clause indicates, further details are to be found later in the contract.

Clause 3.3 provides that the Seller shall not produce natural gas from the field other than for the purposes of (i) delivery to the Buyer or (ii) the purposes specified in Article 5. This too presents a difficulty. Some of the ways in which gas may be used under clause 5 do not appear to be purposes for which gas is produced; for example, I do not suppose that an operator will, in the ordinary way, produce gas in order to flare or vent it. However, it seems to me clear that all gas produced from the Andrew field is, under the contract, to be used either for delivery to the Buyer or in one of the other ways permitted by Article 5. The elaborate provisions of that Article in my opinion show that they comprehend all the purposes for which gas may be used, other than delivery to the Buyer. If that does some slight violence to the language of Clause 3.3, it is nevertheless the only interpretation of it which makes any sense.

The price is determined by some elaborate provisions in Article 10. We were told that presently it is either 17 or 19 pence per therm, and that the market price by contrast is only 11 pence per therm. However, it would seem that the price is in some degree fixed, since we were also told that the Buyers had the advantage of it for the next 25 years.

The nature of the contract is described as "take or pay", by reference to Article 9:

"9.4(1) Notwithstanding anything to the contrary expressed or implied in this Agreement, the Buyer shall in respect of each Contract Year and in addition to the sums to be paid for the Natural Gas actually delivered, pay the Seller for the quantity, if any, by which deliveries to the Buyer under this Agreement during the relevant Contract Year fall short of the Take or Pay Quantity for that Contract Year. Such quantity paid for but not taken is herein called "Take or Pay Gas"."

The take or pay quantity is largely fixed for the first two years, and is thereafter calculated by reference to the ACQ, which is explained next. The words "actually delivered" mean, presumably, what they say.

The nominated quantities

Article 6 deals with quantities; and Clause 6.1 provides:

"For each Contract Year during the Contract Period, there shall be established in the manner provided by this Article 6 the TDCQ, from which the DCQ and ACQ shall be derived."

Those initials stand for Total Daily Contract Quantity, Daily Contract Quantity and Annual Contract Quantity. Once one has ascertained the TDCQ, it is a simple matter to calculate the DCQ. It is the individual Seller's share of the TDCQ, proportionate to his interest in the field. And the ACQ is "the sum of the aggregate of all the DCQs applicable for each day of that contract year". (That means, I think, the sum of the DCQs for that particular Seller.)

The TDCQ is fixed for an initial period, and is then left to be determined by agreement or by reference to an expert. It is evidently supposed to be a proportion of the capacity of the field to produce gas: the contract provides:

""Delivery Capacity" means a capacity to deliver Natural Gas at a rate equal to one hundred and thirty per cent (130%) of the TDCQ."

It follows as a matter of arithmetic that the TDCQ is 76.9% of the capacity of the field.

Clause 6.11(1) provides:

"From the Commencement Date until the termination of this Agreement, the Seller shall maintain a capacity to deliver Natural Gas from the Andrew Field to the Buyer on each Day which is not less than the Seller's Share of the Delivery Capacity, and the Buyer shall have the right, subject to the following provisions of this Article 6, on any and every Day during such period to require delivery of Natural Gas under this Agreement at any rates up to the Seller's Share of the Delivery Capacity, notwithstanding that the aggregate of such Daily requirements in any Contract Year may exceed the ACQ."

The Buyer has to give notice of his requirements as provided by Clause 6.13:

"Not later than ten (10) o'clock a.m. on the Friday preceding each Week the Buyer shall give notice to the Seller ... of the amount of Natural Gas (expressed in MWh) required to be delivered under this agreement for each Day of that Week ..."

There is provision for variation of the notice within certain time limits.

Amended Clause 6.13(4)(a) gives the Buyer limited rights to make a zero nomination.

From this very abbreviated summary the following points emerge:

(i) The Buyer must nominate for each week how much gas he requires.

(ii) That amount may vary from zero to 130% of the TDCQ, which is itself a proportion of the capacity of the field.

(iii) If the Buyer has not taken the adjusted ACQ (total of that Seller's DCQs for the year, subject to some adjustments) in any year, he must pay for it. He will be entitled to an amount of gas equivalent to the shortfall free of charge later.

Finally on the topic of delivery rates and quantities, the contract provides for two plateau periods and two decline periods. Without entering on the detail, I can say that these are part of the elaborate provisions regulating the quantity of natural gas to be delivered.

The background or surrounding circumstances

It has been established law for the greater part of this century that contracts are not construed in a vacuum. The court is entitled to know the surrounding circumstances which prevailed when the contract was made: see Charrington & Co Ltd v. Wooder (1914) AC 71 by Lord Dunedin at p.82.

Equally it is established law first, that subjective evidence of intention by either party is not admissible. I do not regard that as a quirk of English law, justified only by policy considerations. It is justified because the court is looking for the common intention of the parties, and not what intention each had in pectore. Both parties are entitled to know, or to have the means of knowing, what the contract means at the moment when it is made.

Secondly, evidence of negotiations is not admissible. That again is not in my view an exception created for policy reasons from what would otherwise be a general rule. It results from the sound notion that until a contract is made negotiations represent what one party or the other hopes to achieve, not what the contract "actually" means.

What then is comprised by the surrounding circumstances, or the factual matrix as the fashionable phrase is today? To my mind it must mean the immediate context of the contract, facts which both parties would have had in mind and known that the other had in mind at the time when the contract was made.

There is little authority on the point. Perhaps the reason is that (as I understand) the Law Reports are reluctant to report cases which concern the interpretation of contracts, because they are too complicated. A better reason might be that they are frequently one-off decisions, not raising any issue of principle. In recent times I have tried to summarize established principles in New Hampshire Insurance Co v. MGN Ltd (no.1), 15th June 1995, and a later appeal in the same case on 6th September 1996, both unreported. In the second appeal I said this:

"The boundary of what may be considered surrounding circumstances ... is unfortunately not easy to draw. All too often a great deal of evidence is produced under that head which is of little or no help in interpretation."

That was an echo of what I had said in Youell v. Bland Welch & Co (1992) 2 Ll.R 127 at p.133:

"The notion is [that] what the parties had in mind, and the Court is entitled to know, [is] what was going on around them at the time when they were making the contract. This applies to circumstances which were known to both parties, and to what each might reasonably have expected the other to know."

Then I turn to the decision of the House of Lords in Investors Compensation Scheme Ltd v. West Bromwich Building Society (1997) CLC 1243, and the speech of Lord Hoffmann (with which Lord Goff of Chievely, Lord Hope of Craighead and Lord Clyde agreed). It was concerned with a claim form which those seeking compensation under the scheme were required to sign; that may have constituted a contract but not one made by any ordinary commercial process.

Lord Hoffmann at p.1257 prefaced his reasons "with some general remarks about the principles by which contractual documents are nowadays construed." His second principle was this:

"The background was famously referred to by Lord Wilberforce as the 'matrix of fact', but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man."

No authority is cited for that proposition, and it is not possible to tell whether it was the subject of argument. There does not appear to have been any dispute as to what matrix should be taken into account; the only fact external to the claim form which seems to have assumed importance was that the scheme managers provided with the claim form "an explanatory note which was a model of clarity."

As I indicated in the cases cited earlier, it is often difficult for a judge to restrain the enthusiasm of counsel for producing a great deal of evidence under the heading of matrix, which on examination is found to contribute little or nothing to the true understanding of the parties' contract. All, or almost all, judges are now concerned about the huge cost of litigation. I have to say that such a wide definition of surrounding circumstances, background or matrix seems likely to increase the cost, to no very obvious advantage. Since the decision in the Investors Compensation case Saville LJ in National Bank of Sharjah v. Dellborg, 9th July 1997 (New Law Publishing), wrote on the same theme with reference to the surrounding circumstances, and so did Judge LJ. I would add to what they have written a plea that we should confine surrounding circumstances, as I said in Youell's case, to

"what the parties had in mind, what was going on around them at the time when they were making the contract."

Extraneous facts

(1) The Sellers wish us to know that, as might be expected, their field is not used for the production of natural gas alone, but also for the production of oil. That is indeed apparent from the contract itself, which mentions oil production in three different places. I have no difficulty in admitting that as a surrounding circumstance.

(2) Equally I am prepared to attribute to the parties knowledge that oil production is ordinarily the main purpose of a well in the North Sea, although natural gas is a valuable ancillary.

(3) We were told that the amount of gas produced is directly proportionate to the amount of oil produced, at any one time.

(4) There is only limited storage space for gas produced in the Andrews field. A certain amount can be reinjected into the gas cap, and some can be stored in the pipeline leading to the delivery point at Teesside.

Thus far I have no problem. The Buyer too asks us to take into account, as I think we properly can -

(5) The commercial advantage of having an assured supply of natural gas over a period of 25 years, at a price which (although higher than the market price at present) is more-or-less fixed for that period.

(6) What is in dispute is the admissibility of a letter from the Buyer to one of the Sellers during the negotiating period, dated 21st May 1993. It reads as follows:

"I would like to thank you and the other Andrew field Sellers for giving Scottish Power the opportunity to negotiate for the purchase of Andrew Field gas reserves. Our formal offer letter together with our proposals on the Key Commercial Terms and the Agreement are attached.

In reviewing the contract documents I note that the Sellers may have some concerns with the predictability of the reservoir performance. Specifically Articles 5.1(11), 5.2 and 6.3(1) together with the references contained in the Notes on Negotiation to negotiating the provisions governing the gas cap and the gas start up indicate possible technical reservations.

In the event such concerns were to arise we believe we would be in the best possible position to assist and ensure the continuation of oil production. By the end of 1996 we anticipate that both our Longannet and Kincardine power stations will be able to burn gas for generation and will be linked to the British Gas transmission system. We are also well advanced in joint studies with Hydro Electric to link the Peterhead power station to the British Gas system.

These three power stations together with our gas marketing affiliate Caledonian Gas place us in the unique position of being able to handle any uneven gas production pattern either on start up or in producing from the gas cap at the end of field life. Our proposals on Take or Pay are designed to give you further comfort in ensuring the maximisation of oil production.

We look forward to receiving your confirmation that Scottish Power has been short listed for the final negotiations."

That letter seems to me typical of the material which is now put before the courts with a cry of Matrix, and which self-evidently is not a guide to the interpretation of the contract. The writer sent with it his proposals for the actual terms of the contract; the letter itself dangled a non-binding assurance on a hook for the Sellers to swallow. Hence the word "comfort", often used in commerce to describe such an assurance. In my judgment the letter should be left out of account entirely.

Clause 5.1

This is the clause which is said, when construed in the light of the points listed at (1) to (5) above, to confer a wide power on the Sellers to sell natural gas from the Andrew field to others. It starts as follows:

"5.1 Notwithstanding anything to the contrary expressed or implied in this Agreement, the Seller shall have the following rights:

(1) without prejudice to its obligations to deliver the quantities of Natural Gas properly nominated by the Buyer under Article 6 through facilities provided, installed, repaired, replaced, maintained and operated under Article 7, the right to decide the manner in which it conducts its operations."

There then follow paragraphs dealing with - (2) the use of gas for the payment of royalties in kind, (3) use for developing and operating the Sellers' facilities and the Cyrus field, (4) and use for the operating of the Andrew field and the Cyrus field, (5) the right to sell normal quantities of natural gas in the oil stream, (6) the right to remove constituents other than methane, (7) the right to pool, combine or unitize with natural gas in any other licences, (8) the right to commingle with natural gas produced from other fields or reservoirs, (9) the right to substitute at the delivery point natural gas from other fields or sources, and (12) the right to store natural gas not taken by the Buyer.

It is in those provisions that one also finds clauses 5.1 (10) and 5.1(11). I take the latter first, since it deals expressly with sale.

Clause 5.1(11)

This grants to each Seller -

"the right, if Buyer fails to take any quantity of Natural Gas which is available for delivery from the Seller up to the DCQ, for any reason whatsoever (including but not limited to Force Majeure), to sell such quantity of Natural Gas, which the Buyer has failed to take, at the Delivery Point to any other purchaser until the buyer notifies the Seller that it is ready to resume taking such properly tendered Natural Gas; provided that during such period, the Seller shall not be obligated until the Seller's receipt of the Buyer's written notice of resumption, to continue tendering Natural Gas and the Buyer shall remain obligated under Articles 3,9,10 and 11 to pay the Seller at the Contract Price for such quantity of Natural Gas tendered from the Andrew Field (including the quantity of Natural Gas sold to others up to the DCQ) even where the same is not taken by the Buyer; and

The Buyer contends that the clause is only dealing with gas which has been nominated under the provisions of clause 6; if the Buyer fails to take it, whether due to force majeure or for any other reason, the Sellers may sell it to others. The Sellers, on the other hand, argue that in any case where they have gas available and the Buyer takes less than the Daily Contract Quantity, they may sell to others.

The solution reached by Colman J. was that the clause did indeed apply whether the Sellers had nominated any quantity or none, and consequently whether or not they were in breach of contract. But the condition "if the Buyer fails to take any quantity" was only fulfilled if the Buyer had taken no gas on the day in question, either because he had made a zero nomination or because, having made a positive nomination, the Buyer took delivery of no gas. Although that is a meaning which the words "any quantity" could bear (as opposed to "any particular quantity"), the parties are at one in rejecting this aspect of the solution reached by the judge. It founders, in my judgment, on the words "up to the DCQ" qualifying "any quantity".

On any view clause 5.1(11) presents considerable difficulties, but in my opinion the Buyer's construction is to be preferred if one has regard to the language alone. The words "fails" and "failed" are of course capable of referring to a wrongful omission, or simply to an omission. I derive no help from their use in other parts of the contract, since the standard of draftsmanship is not such as to persuade me that I should. But the words "such properly tendered natural gas" do seem to me apt to refer to gas that has been nominated for delivery under the agreement. (The draftsman could have used the expression "properly nominated", which he had defined. I draw no inference from the fact that he did not do so.) Equally, the provision that the Sellers shall be under no further obligation to continue tendering natural gas (whatever precisely is meant by tendering in this contract), until notice of resumption, seems to me more consonant with breach by the Buyer or force majeure, than with a mere omission by the Buyer to take all the gas which the Sellers would like to sell. Most significant, to my mind, is the provision that the Buyer shall

"remain obligated under Articles 3,9,10 and 11 to pay the Seller"

even if the gas is not taken by the Buyer and is sold to others. Where, one asks, does that obligation come from if the gas was not nominated by the Buyer for delivery and the Buyer was under no obligation to take it?

There are difficulties nevertheless with the Buyer's construction. Why is the amount which the Sellers may sell to others limited to the Daily Contract Quantity, when the Buyer may have nominated and then failed to take up to 130 per cent of that figure? And why is there a reference to Article 9 among those which are relevant to the Buyer's obligation to pay,when that Article is wholly or mainly concerned with payment for gas which has not been taken at the end of the contract year? There is also a problem with Article 6.13(4)(a). This says that, in each of the first two contract years,

"The Buyer shall have the right (subject to the provisions of clauses 5.1(10) - (12) inclusive) to make a Daily Nomination of zero ..."

Correctly used, the words "subject to" mean that two provisions in the contract are in conflict, and that the first-mentioned is to be subject to, yield to, the second when the conflict occurs.

On the Buyer's construction, there was no need to provide that this right was subject to 5.1(11). But equally, as it seems to me, there was no need to provide that the right was subject to 5.1(10) or 5.1(12). And even on the Sellers' construction there was precious little need to say that the right was subject to 5.1(11); on that basis the Buyers could make a zero nomination but the Sellers could still sell gas to others.

The difficulties facing the Sellers' construction are far greater, and in my opinion insoluble. I have already mentioned (i) the obscurity in the words "such properly tendered natural gas" in a situation where no gas has been nominated or less than the Sellers wish to supply, (ii) the question why the Sellers should be absolved from tendering until further notice if the Buyer has committed no breach of contract, and (iii) the further question why, after no breech of contract, the Buyer should be obliged to pay for the gas which is also paid for by someone else. There is an additional problem over the words "remain obligated". Mr Grabiner, for the Sellers, submits that the words

"such quantity of Natural Gas tendered from the Andrew Field (including the quantity of Natural Gas sold to others up to the DCQ)"

near the end of the clause, "refer to the quantity of gas which is available for delivery up to the DCQ whether taken by the Buyer or purchased by a third party". So this is evidently a calculation to be made on each day when the problem arises. It has nothing to do with Article 9, the take or pay clause, which operates at the end of the contract year. The Buyer is to remain obligated to pay both for the gas which he has properly nominated and taken delivery of (if any), and for further gas which the Sellers have tendered (up to the Daily contract Quantity in all) and the Buyer has not taken, if the Sellers have sold it to others. (I accept Mr Grabiner's suggestion that "up to the DCQ", despite its position in brackets, applies to the total of both quantities.)

I can find no warrant for that obligation. Furthermore it seems to me inconceivable that, after the elaborate nomination provisions in Article 6 and the take or pay provisions in Article 9, the parties would have agreed an independent right of the Sellers to visit the cost of gas sold to others upon the Buyer (as well as on the new buyer) on every day of the contract when the Buyers nominates less than the Daily Contract Quantity and the Sellers thereupon chose to do so.

A further argument of Mr Wilmot-Smith for the Buyer was that, under Article 9, the Sellers were obliged to pay for the deficit if during a contract year they had taken less than the adjusted Annual Contract Quantity; but an equal quantity of gas was carried forward and could be taken free in subsequent years. How would the Buyer obtain that gas if the Sellers had sold all that was left to others? I was not impressed by that point, since the Buyer could no doubt see this situation coming and take action to prevent it.

Nevertheless in the result I accept the Buyer's construction and reject that of the Sellers. If that means that the Sellers must restrict their production of oil so as to avoid producing more gas than they can either deliver to the Buyer or use under Article 5, my answer is that they should have foreseen that possibility and must live with it. (Indeed the Buyer's letter shows that very probably they did foresee it.) The contract envisages that they will produce oil as well as gas; but it does not give them a right to produce oil at such rate as they choose, so as to override the carefully drafted provisions as to the rate at which the Buyer may choose to receive gas.

Clause 5.1(10).

This clause grants to the Sellers -

"... the right to flare, vent or otherwise dispose of Natural Gas only to the extent required because of (a) the operational requirements from time to time of a Reasonable and Prudent Operator for the Andrew facilities or (b) onshore or offshore restrictions on production or throughput arising from or due to any operational requirement or (c) any inability of the Seller to deliver Natural Gas to the Delivery Point or (d) any inability or failure of the Buyer to take Natural Gas; ..."

Reasonable and Prudent Operator is defined in Article 1 as -

"... a Person seeking in good faith to perform its contractual obligations and, in so doing and in the general conduct of its undertaking, exercising that degree of skill, diligence, prudence and foresight which would reasonably and ordinarily be expected from a skilled and experienced operator engaged in the same type of undertaking under the same or similar circumstances and conditions ..."

The Seller's Facilities (not the Andrew facilities) are also defined -

"Seller's Facilities" means the production wells, platforms, separation, processing and treating equipment, pipelines and other equipment (including reasonable standby equipment and adequate spare parts) more particularly described in Part X of the Schedule whether or not owned by the Seller and the Other Sellers installed or used for the purpose of producing Natural Gas from the Andrew Field and delivering the same at the Delivery Point under this Agreement."

One should note that the purpose is producing natural gas; by contrast, in Part X of the Schedule, it is provided that the drilling of wells -

"will be phased over the productive life of the Andrew Field utilising an overall philosophy of maximising economic oil production."

Colman J. held that the words "or otherwise dispose of" in clause 5.1(10) included sale to purchasers other than the Buyer. For example, under event (a) in that clause there might arise -

"the need to dispose of surplus gas in a case where the Seller could not otherwise maintain its ordinary required production of oil. Accordingly if, due to breakdown of the re-injection plant, the Seller is forced to accumulate surplus gas beyond the requirements of the Buyers and beyond its own needs it can sell the surplus, but no more than the surplus to a third party, if disposal of that surplus is necessary to maintain oil production of the Andrews field at the required level."

(I should say in parenthesis that the reinjection plant had in fact broken down for a substantial period, and was still in that state at the time of the trial before Colman J. But I do not regard that as itself a fact relevant to the construction of the agreement, merely an example of an event which the parties may have contemplated. We were urged to bear in mind that clause 7.2 and Part X of the Schedule require the Sellers to "provide, install, repair, maintain and operate" a gas injector.)

Thus the first conclusion of Colman J. in clause 5.1(10) was that under event (a) the Sellers were entitled to sell gas which was surplus, bearing in mind "operational requirements" aimed at their "ordinary required production of oil". The judge's second conclusion was that the Sellers could sell gas to other purchasers if there was "inability or failure" of the Buyer to take it, under event (d). That was not in his opinion limited to failure to take gas nominated by the Buyer for delivery under the contract; but the right could only be exercised in the same way as the judge had decided in relation to clause 5.1(11) - if the Buyer had failed to take any quantity of gas, either because he had nominated a zero quantity, or had failed to take any part of his nominated quantity.

Even if the Sellers uphold the judge's interpretation of the clause, they must as it seems to me accept the limit which he found on event (a); gas can only be sold to others "to the extent required ... by operational requirements." They do not, however, accept the limit which the judge imposed on sales under event (d). They say that, if there is any inability or failure of the Buyer to take natural gas (? up to the DCQ), whether nominated or not, they can sell it elsewhere.

The first point to note about clause 5.1(10), in my opinion, is that it is the bedfellow of 5.1(11). The latter contains detailed provisions as to when, in terms, the Sellers can sell natural gas to other purchasers. One would therefore not expect 5.1(10) to provide wider rights to the Sellers, amounting almost to carte blanche to sell. This indeed was the view of the judge, since he tailored event (d) to match his conclusion as to what 5.1(11) meant. In a sense, I would do the same; I cannot accept a meaning of 5.1(10) and event (d) so wide as to render clause 5.1(11) wholly unnecessary. The difference is, that I have given a narrower meaning than the judge did to 5.1(11).

In my judgment "any inability or failure" in event (d) refers to any occasion when the Buyer, having nominated a quantity for delivery, has omitted to take delivery of all or part of that quantity either through force majeure ("inability") or breach of contract ("failure"). On that interpretation event (d) does not give the Sellers vastly wider rights than (5.1(11). On any view they are somewhat wider, since "flare, vent or otherwise dispose of" are either wider than or different from sale.

Likewise I do not accept the judge's construction of event (a). In my opinion the "operational requirements" referred to are the operations of the machinery in connection with the production and sale of natural gas. They are not commercial requirements, such as the incentive to produce more oil (and consequently more gas) so that the oil may be sold.

But if I am wrong in either of the last two conclusions, I would hold that the words "otherwise dispose of" in clause 5.1(10) do not include sale to other purchasers. Indeed there is a good argument that they do not in any event include sale, since it is expressly dealt with in 5.1(11). But if event (a) or event (d) is wider than I have concluded it is, there is an even stronger case for saying that sale is not within 5.1(10).

Accordingly I hold that, on the language of the contract, the Sellers are not entitled to sell gas to third parties save and to the extent that the Buyer has failed to take delivery of gas nominated by the Buyer in accordance with the contractual terms. I do not consider that surrounding circumstances, such as the fact that the Sellers may have to limit oil production in order to comply with the choice which they have given to the Buyer as to the rate of delivery of gas, is sufficient to rebut that conclusion. Nor are the other circumstances mentioned earlier. But I am not convinced that the declaration sought in paragraph 1(a) of the Buyer's written argument is wholly appropriate. I would hear counsel on that question.

An injunction

Colman J. said that, even if he had concluded that the Sellers were not entitled to sell gas to others, he would have declined to grant an injunction unless the Sellers had refused to give an undertaking which would adequately protect the Buyer by way of hydrocarbon accounting. He gave two reasons. First, he was not satisfied that the Buyer would suffer any loss which could not be compensated by damages; secondly, if an injunction were granted the Sellers "would suffer prejudice out of all proportion to the Buyer's entitlement to relief." The judge also considered it doubtful, in view of the wording of clause 3.3, that there was an express or implied negative covenant prohibiting the sale of gas to others.

I can deal with the last point briefly. Differing from the judge, I have held that it is a breach of contract for the Sellers to sell gas to others otherwise than as permitted by clause 5.1(11) (and perhaps by clause 5.1(10) in limited circumstances). In doing so I have expressed my view on the meaning of clause 3.3., in the context of other provisions in the contract.

Mr Wilmot-Smith for the Buyer relied on a passage in the judgment of A L Smith LJ in Shelfer v. City of London Electric Lighting Co. (1895) 1 Ch.287 at p.322:

"In my opinion, it may be stated as a good working rule that

(1) if the injury to the plaintiff's legal rights is small,

(2) and is one which is capable of being estimated in money,

(3) and is one which can be adequately compensated by a small money payment

(4) and the case is one in which it would be oppressive to the defendant to grant an injunction:-

then damages in substitution for an injunction may be given."

In Jaggard v. Sawyer (1995) 1 WLR 269 at p.287 Millett LJ said:

"Laid down just 100 years ago, A L Smith LJ's check-list has stood the test of time; but it needs to be remembered that it is only a working rule and does not purport to be an exhaustive statement of the circumstances in which damages may be awarded instead of an injunction."

This is not at all the sort of case which was contemplated in those authorities. What is sought is a quia timet injunction. The timing and extent of the breach or breaches of contract by the Sellers which are feared are, so far as I know, entirely uncertain. Perhaps when the case was before the judge there was an immediate prospect of the Sellers selling natural gas to others, and the quantities could be defined, because the reinjection plant was not operating. But now it is entirely uncertain when, in the next 25 years, the Sellers will want to sell to others, and how much they will sell at a time. If the damages had to be assessed now, as the price for the Sellers having a licence to break their contracts, the loss would be impossible or very difficult to calculate. Prima facie it would be nil, as the market price of natural gas is presently lower than the contract price. But the market price may rise in the next 25 years - all experience in the last 25 years suggests that it will. What is the worth of a contract which protects the Buyers against that eventuality? It is not a problem which I have met before.

Fortunately I do not think that we are asked whether future breaches of contract can be remedied by an award of damages to-day. The question is whether such breaches can be remedied, as and when they occur (or within a few years thereafter, to allow for the law's delays) by an award of damages then. The problem will still present some difficulty, but a good deal less than it does to-day. At least the quantity of gas sold in breach of contract will be known. I do not doubt that the ingenuity of the lawyers whose advice is available to the Buyer will produce a plausible calculation. So I agree with the judge that damages will be, very arguably, a sufficient remedy, if he was speaking of that kind of calculation.

I also agree that the grant of an injunction would be oppressive to the Sellers. We are told that loss of oil production for one day results in lost revenue of $1.2 million, at a price of $20 a barrel. That is likely to exceed the Buyer's loss if natural gas is sold elsewhere by a considerable amount, as I infer.

Injunctions, even negative injunctions, are rarely sought or granted between traders in marketable commodities, so far as my experience goes. The goods are often fungible for practicable purposes; if by reason of a breach of contract they are not bought and sold here, they will be bought and sold somewhere else. I would be reluctant to impose the regime of an injunction on the parties to such a contract, without good reason to do so.

The judge was also impressed, as I am, by a proposal on behalf of the Sellers that they should undertake to compensate the Buyer by a process which they called hydrocarbon accounting. Colman J. would have refused an injunction if such an undertaking had been offered, and so would I. To avoid or at least reduce further dispute, I should explain what I believe should be offered by the Sellers. First, I would require a contractual promise, and not an undertaking to the court; the stage has not been reached where one might be thinking of sanctions for contempt of court, and I trust that it never will be. Secondly, the promise must be that if the Sellers sell gas to others in breach of contract, they will deliver an equivalent quantity (in hydrocarbon terms - whatever that may mean) to the Buyer as and when the Buyer requires it to be delivered. Thirdly, that obligation will be absolute, not subject to any exception. I do not doubt that this rough outline will require some detailed consideration. If the Sellers comply, I would not grant an injunction. But on the interpretation of the contract I would allow this appeal.

LORD JUSTICE OTTON: I agree that this appeal should be allowed for the reasons stated by Staughton LJ. I would grant the Declaration as sought. I also agree with his conclusion that an Injunction should not be granted.

LORD JUSTICE ROBERT WALKER: I have had the advantage of reading in draft the judgment of Staughton LJ and I largely agree with it. I add a few comments of my own in deference to counsel's persuasive submissions, and to indicate those points on which I take a slightly different approach.

On any view the basic physical facts about production from the Andrew field are surrounding circumstances relevant to the construction of the agreements, especially so far as they were explained in the technical presentation which BP and the other original sellers made to tenderers in August 1993.

The Andrew field (which is situated in the North Sea about 250 km ENE of Aberdeen) has reserves of both natural gas and oil: in the simplest of terms, there is a gas cap, under that a layer of crude oil, and under that a huge aquifer. The production platform is equipped with two high-pressure separators which divide natural gas (at that stage, a mixture from which methane, butane and propane will be processed) from the crude oil. The oil is metered and enters first the Brae Pipeline and then the Forties Pipeline which comes ashore at Crudden Bay near Peterhead. Natural gas which is to be transported ashore is analysed and metered and enters the CATS (Central Area Transmission System). The CATS comes ashore at Teesside, where the gas is treated at the Enron processing plant. Processed methane is then delivered into the Transco HPTS (High Pressure Transmission System), the delivery point being immediately downstream of the processing plant.

However not all the natural gas separated out at the production platform is brought ashore at once. The operational strategy for the field has from its inception been that very large quantities of natural gas would be reinjected into the gas cap, so maintaining a reservoir of natural gas and, at the same time, assisting the extraction of crude oil. Reinjection is achieved by specialised equipment on a gas cap production well. This equipment, when operating correctly, compresses the gas and reinjects it at very high pressure. It was serious problems with the compressor, during the autumn and winter of last year, that eventually led to this litigation, although the differences of opinion between the parties as to their contractual rights and obligations have now widened and are no longer limited to the duration of the reinjection equipment's malfunctioning.

The plaintiff, Scottish Power plc, buys gas for use in generating electricity. It is referred to in the contractual documents and in the judgment below as the "buyer" and it is convenient to use that phrase. Similarly it is convenient to use "the seller" to denote any of the five defendants, each of which is bound (either as an original contractor or by novation) to sell gas to the buyer under the terms of five identical contracts, each comprised in a principal agreement dated 4 February 1994 and two supplemental agreements both dated 10 July 1996 (one putting all dimensions and quantities in the principal agreement into metric form, and the other making amendments of substance).

The fact that the delivery point is downstream of the Enron processing plant at Teesside is something that must be borne in mind in trying to interpret the largely unexplained references to tendering and delivery which occur throughout the agreement. By the delivery point natural gas originating from the Andrew field had been mingled in the CATS with other natural gas from other fields and processed to produce methane to be delivered to a quality and at a pressure meeting the requirements of the agreement. Subject to those requirements, gas is treated as a fungible. In these circumstances I agree with Staughton LJ that the puzzling reference to "properly tendered gas" in article 5.1(11) means no more than gas which is available for delivery and which the buyer was under an obligation to take (or would have been under an obligation to take but for force majeure). The equally puzzling reference to a written notice of resumption given by the buyer also suggest that the parties may have been thinking not of a routine zero nomination but of some untoward event such as damage to the Transco HPTS.

Whether economic considerations are also admissible as aids to construction is much more open to debate. Each seller is primarily an oil company although each is also concerned to some extent with natural gas. There is evidence that in general economic terms the production of oil from the Andrew field is more important than the production of gas. In terms both of volume and of value, the oil capable of being produced during the field's useful life (a maximum of 25 years, and possibly a good deal less) is expected to be about seven times greater than the gas. However the buyer was interested only in the gas and was prepared to enter into a long term contract (with all the market risks inherent in such a contract) in order to obtain a long-term supply. These basic economic facts would have been known to the buyer as well as each of the sellers. Nevertheless the bargain which the parties have made must in the end depend on the terms which they have agreed.

The agreements constitute a commercial contract of some complexity, and its complexity is increased by some important changes which the supplemental agreement effected by textual substitution. The most important provisions, for present purposes, are Articles 3 (sale and purchase), 5 (seller's reservations), 6 (quantities) and 9 (take or pay), supplemented by occasional references to Articles 1 (definitions), 7 (facilities) and 15 (force majeure). Many of those provisions are set out or summarised in the judgment below or in the judgment of Staughton LJ and I will not repeat them.

The following points seem to be reasonably clear and uncontroversial.

The contract was initially a pure "take or pay" contract under which the buyer could (subject to some restrictions) nominate how much gas it was to take, but had to pay for what might be called an adjusted target quantity (the adjusted ACQ, or annual contract quantity) whether the buyer took it not (seeespecially Article 9.3 as amended)

The pure "take or pay" character of the contract was altered by the amendments made in 1996, in that during the first contract year (October 1996 to September 1997) the buyer was obliged to nominate and take delivery of gas at the average daily rate of at least 12 mmcfd and during the second contract year (October 1997 to September 1998) at the rate of at least 19 mmcfd, with allowances for maintenance days (see especially Article 6.2(2); I use the original imperial measures because they produce round numbers). There was also a special provision for the first months of the first contract year which may have reflected some lack of confidence in the commissioning of the gas reinjection facilities (Article 6.13(2) proviso as inserted). Nevertheless the general scheme of the agreement must, it seems to me, be gathered from the original text rather than from the amendments unless they clearly alter the whole scheme.

I have referred above to the ACQ as a sort of target quantity. The ACQ is, in respect of a contract year, 365 times the aggregate of the DCQs, or daily contract quantities. During the initial "plateau" period the TDCQ (the total daily contract quantities for all five sellers) were to be 27 m m c f d (Article 6.2 as amended). After the plateau period the TDCQ was to be negotiated, or if necessary to be determined by an expert, in the light of conditions as they then stood (see especially Article 6.4). The plateau period (during which the volumes of both oil and gas produced were expected to be fairly constant) was to last for at least four years, after which it could be terminated by the sellers (Article 6.3(2)).

Another important concept is the Delivery Capacity, which is defined as a capacity to deliver gas at a rate equal to 130 per cent of the TDCQ. The seller must maintain that capacity and the buyer may require delivery of gas up to the limit of the Delivery Capacity, even if the ACQ is exceeded, so long as it is not exceeded by more than 15 per cent (Article 6.11(1) and (3)). Indeed the buyer may even ask for gas in excess of the Delivery Capacity, in which case the seller is to use its best endeavours to deliver it, but the buyer must pay a premium price (Article 6.11(2)).

The normal contract price is 17.5p per therm adjusted annually by reference to three different indices (Article 10).

The seller is under an obligation to maintain and repair its facilities (Article 7). But there is a general exception from liability for failures caused by force majeure, which is defined as including failure or breakdown of plant or machinery (Article 15).

The various paragraphs of Article 5.1, although not all aptly described as "purposes", are qualifications on the primary obligation of the sellers, under Article 3.1 and Article 3.3, to sell, tender and deliver gas from the Andrew field, and not to produce gas otherwise than for sale to the buyer or for the "purposes" specified in Article 5.1.

Although some fairly extensive changes were made by the supplementary agreement of 10 July 1996 (and were made, presumably, in the light of experience as the facilities were commissioned and the field came into production) I am not satisfied that they should be seen as altering the general scheme of the agreement or as affecting the construction of Article 5.1 (10) and (11) (neither of which was in terms amended). It is to Article 5.1 (10) and (11) that I now turn.

I can set out my view on article 5.1 (10) very shortly. The following paragraph (11) gives a power of sale in certain circumstances, which appear to overlap with those described in paragraph (10). Paragraph (11) does, but paragraph (10) does not, refer to the payment provisions in Articles 3, 9, 10 and 11. The language used in paragraph (10) is "to flare, vent or otherwise dispose of". Flaring and venting are means of destroying gas, or at any rate disposing of it in a way that abandons any prospect of turning it to account. I cannot accept that "or otherwise dispose of" can have been intended to include sale. Had sale been intended, that word would have been used. Judges are today reluctant, and properly reluctant, to explain decisions on the use of language by reference to maxims expressed in Latin. But this case can be seen as an illustration of the ejusdem generis rule, which in appropriate circumstances remains sound "both in law and as a matter of literary criticism" (Larsen v Sylvester [1908] AC 295, 297).

I respectfully agree with Staughton LJ that there is no construction of article 5.1 (11) that avoids all its difficulties; but that the difficulties in the way of the sellers' construction are greater than those in the way of the buyer's construction. Although the agreement is not uniformly accurate in the use of language, I can discern some intended contrast of meaning between "inability" (a word used twice in paragraph (10)) and "failure" and "fails" in paragraphs (10) and (11). The failure need not necessarily amount to a breach of contract, because of the reference to force majeure. But it must to my mind be some event which means, in a general sense, that the agreement is not working as it should. The references (already mentioned) to "properly tendered natural gas" and to "the buyer's written notice of resumption", puzzling though they are, seem to me to point fairly clearly in that general direction. I do not see how they can point simply to the buyer's decision, consistently with its rights under the agreement, to nominate a zero quantity or another permitted quantity less than the DCQ. The reference to the DCQ (reflected in the following expression "such quantity of natural gas) must to my mind reflect no more than the parties' agreement to set that ceiling on any extraordinary sales permitted under paragraph (11).

I cannot therefore agree with the Judge's view (which neither side supported in this court) that paragraph 5.1(11) applies whenever the buyer takes no gas in the course of the contract day (whether or not it has consistently with the contract made a zero nomination for that day). Nor can I accept the seller's submission that it applies whenever in any circumstances the buyer takes less than the DCQ. In my judgment it is limited to cases where the buyer does not or cannot take delivery of gas and for that reason is in breach of contract (or would be in breach of contract but for force majeure). I would therefore make the declaration which the buyer seeks.

Like Staughton LJ I have, in the unusual circumstances of this case, found the issue of injunctive relief a difficult one. I feel considerable doubt as to whether damages would be an adequate remedy - not because of the sellers' inability to pay damages, but because of the difficulty in quantifying them. Nevertheless I concur in the course proposed in the last paragraph of Staughton LJ's judgment.

ORDER: Appeal allowed. Leave to appeal refused.

(Order not part of approved judgment)