England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION, COMMERCIAL COURT
Mrs Justice Gloster DBE
2006 [EWHC] 3068 (Comm)

		And A3/2007/0341 Royal Courts of Justice Strand, London, WC2A 2LL
		27/11/2007

Lord Justice Waller :

1. This case is concerned with the construction of a long term interruptible gas supply agreement (the GSA) entered into between British Gas (BG) and Premier Power Limited (PPL) on 1 April 1992 under which gas was to be supplied to Ballylumford Power Station via pipelines, including a pipeline at that time still to be constructed under the Irish Sea. The plan at the time was that the pipeline would be constructed and run by BG or an affiliate of BG. The case is, in particular, concerned with how the provisions of that agreement, concerned with charging for the transmission of gas through the pipeline, should be construed in the light of changes in circumstances after April 1992. The GSA provided for PPL to pay a commodity charge and "transmission charges" which related to the costs of connection to the national transmission system and transportation along the pipelines. The transmission charges contained an element of capital recovery, covered by an actual monthly charge (AMC), certain predictable charges, such as routine testing known as BGPOCs, and unpredictable charges (BGUOCs), the focus of this appeal (all as defined in an annex – Annex 5 to the agreement).
2. The judge in her judgment sets out the detail, but it is possible to summarise the position in the following way. When the agreement was entered into the pipeline under the Irish Sea was to be built, owned and operated by an affiliate of BG, Premier Transco Limited (later renamed Premier Transmission Limited (PTL)). When deliveries started in 1996 PTL performed, as between itself and BG, initially under a Transportation Agreement dated 6 September 1996. So far as charges for transportation were concerned, that agreement was effectively back to back with the GSA so far as AMC, BGPOCs and BGUOCs were concerned. In February 1997 BG demerged into two publicly listed companies, Centrica and BG plc. This had consequences which are non-controversial. BG was replaced by Centrica and performance by Centrica was to be carried out by its wholly owned subsidiary, British Gas Trading Limited (BGTL). Thus, for BG in the agreement, one must now read Centrica.
3. The demerger also resulted in PTL becoming a subsidiary of BG plc and it followed that PTL was no longer an affiliate of BG or Centrica. So far as those operating the GSA were concerned at the time of the demerger, the fact that PTL was no longer an affiliate did not make any difference to the way the GSA operated. So far as transmission charges were concerned, effectively PTL charged Centrica under the Transportation Agreement and Centrica charged the same AMC, BGPOCs and BGUOCs under the GSA. The transfer agreement was then replaced by the Transportation Code in 2001. PTL from that time charged under the provisions of that code which, so far as charging for transportation was concerned, was again effectively back to back with the equivalent provisions of the GSA, and Centrica in its turn charged PPL under the provisions of the GSA, i.e. Annex 5. PPL continued to pay the same without protest, and indeed paid until February 2002 a further charge made by PTL by virtue of the Transport Code called "balancing and scheduling charges" treating them as BGUOCs.
4. What caused a problem as between PPL and Centrica followed government action which from 1 October 2004 changed the basis of charging as between PTL and Centrica, resulting in a different method of charging and in increased charges which Centrica sought to pass on to PPL as BGUOCs. From 1 October 2004, PTL's conveyance licence was modified, pursuant to the Gas (Northern Ireland) Order 1996 and The Energy (Northern Ireland) Order 2003, requiring PTL to charge what were termed "monthly postalised payments" (MPPs). These were introduced so as to force pipeline owners to charge a common tariff, assessed by reference to all pipelines transmitting gas to those in Northern Ireland, whatever length of pipeline was being used, so that those receiving deliveries over great lengths of pipeline were paying the same as those over the shorter distances.
5. In invoicing Centrica for the transmission costs PTL no longer used the detailed provisions aimed at defining the capital cost of building and operating the pipeline but charged the MPPs, and Centrica, when charging PPL, also sought to pass on the MPPs again no longer charging by reference to the provisions relating to AMC and BGPOCs as set out in Annex 5 of the GSA. They relied simply on the provision relating to BGUOCs in that annex. As invoices shown to us demonstrated, a format different from that which had been employed up until October 2004 was adopted.
6. Centrica had no option but to accept the new basis of charging by PTL, but PPL maintained that it was not open to Centrica to charge on the basis of MPPs. A point taken was that, since PTL was no longer an affiliate, BGUOCs were no longer recoverable. PPL, through its solicitors, offered to accept liability on the basis of charges calculated as previously, offering indeed to treat PTL as if it was an affiliate incurring the charges as contemplated when the GSA was made in 1992, but PPL refused to pay on the basis of the MPPs being charged by PTL to Centrica. At the same time they also refused to pay the charges known as "balancing and scheduling charges" imposed by the Transportation Code which PPL had paid up until October 2004.
7. The sums in issue so far as the MPPs are concerned are very much higher than those relating to scheduling and balancing charges; in the case of MPPs the sum was as at the date of the hearing at first instance, nearly £26 million and, in the case of and balancing and scheduling charges, was some £3.2 million. The GSA has until 31 March 2009 to run with an option for PPL to extend to 2012, and sums in issue are accordingly very large indeed.
8. Centrica maintained that both the MPPs and the balancing and scheduling charges were recoverable under the existing terms of the GSA. In the alternative they pointed to provisions which in certain circumstances entitled Centrica to vary the GSA, and they argued that, if they were wrong in their primary contention, the terms as to variation were engaged and they were entitled to vary the terms so as to allow for recovery of both MPPs and balancing and scheduling charges.
9. Before the judge Centrica failed on their primary case, that on a true construction of the GSA both MPPs and balancing and scheduling charges were recoverable as BGUOCs. They also failed on their entitlement to vary so far as balancing and scheduling charges were concerned but succeeded on their entitlement to vary as far as MPPs were concerned.
10. PPL have appealed the variation aspect relating to MPPs, and Centrica have appealed on their primary case on construction. That latter case relates to both MPPs and balancing and scheduling charges but, if that case fails, they do not pursue an appeal in relation to their entitlement to vary so far as the balancing and scheduling charges are concerned.
11. The appeal was opened by Lord Grabiner QC for PPL seeking to reverse the judge's decision on the variation aspect. Mr Sumption QC then opened his appeal on construction and responded on the variation appeal. Lord Grabiner responded on construction and replied shortly on variation. Mr Sumption replied shortly on construction. It is logical, so far as this judgment is concerned, to start as the judge did with construction.
12. It is convenient at this stage to set out the relevant terms of the GSA , but with this explanation in order to save having to quote some terms. Under the GSA gas was to be transmitted through one pipeline that already existed owned and operated by Bord Gais Eireann (BGE) up to the coast of Scotland, and another under the Irish Sea to be constructed by BG or an affiliate.

". . . .

NOW THIS AGREEMENT WITNESSETH that British Gas hereby agrees to supply and the Customer hereby agrees to take and pay for gas and to pay transmission charges in accordance with and subject to the Special Conditions below and the provisions of the Annexes to this Agreement.

. . .

2.1. The Customer shall pay to British Gas:

(a) a commodity charge for gas supplied under this Agreement (referred to as the Modified Reference Price) and

(b) A charge for the costs of connection to the national transmission system of British Gas and gas transportation along the Pipeline (referred to as the Transmission Charges).

. . .

2.6. The Transmission Charges shall be calculated and paid in accordance with Annex 5 and General Condition 4.

. . .

4. Payment:

(1) British Gas will render invoices promptly for Transmission Charges (except BG Unpredictable Operating Costs Payable by the Customer) and for gas supplied hereunder following the period of supply which will, wherever reasonably possible, correspond to a period of one Month. The invoices shall include, but need not be limited to, the following information:-

(i) The Transmission Charges relating to that Month.

(ii) The period of supply.

(iii) The number of therms supplied.

(iv) The Calorific Value expressed in megajoules per cubic metre and in British Thermal Units per cubic foot.

(v) The price or prices of gas in pence per therm for the period of supply.

(vi) The total amount payable to British Gas."

Annex 5 – Transmission Charges

"Part 1 – Preliminary

1. Transmission Charges shall be paid by the Customer monthly in arrears during that part of the Supply Period commencing on the Substantial Completion Date, save only the BG Unpredictable Operating Costs Payable by the Customer which shall be paid by the Customer in arrears in accordance with General Conditions 4(2) and 4(3) in Annex 3 to this Agreement.

. . .

3. BG Unpredictable Operating Costs shall be calculated without variation in accordance with relevant expenditure incurred from time to time by British Gas.

4. Transmission Charges shall be paid whether or not gas is actually supplied and/or consumed pursuant to this Agreement and whether or not any right of interruption is exercised pursuant to this Agreement.

. . . .

Part 2 – Calculation

The actual monthly charge shall be calculated in accordance with the following formulae . . . . . .

. . .

Part 3 – Definitions of Words and Expressions

"6. "BGE Charge for Operational Costs" means in respect of any Month the charges payable by British Gas or any Affiliate thereof (as defined in General Condition 14(4) in Annex 3 to this Agreement) to BGE in that Month representing the share of British Gas of the costs of operating the BGE Pipeline and shall include any charges of whatever nature payable by British Gas in respect of transportation of gas through the BGE Pipeline.

. . .

11. "BG Unpredictable Operating Costs" means all costs and expenses reasonably and properly incurred by British Gas or any Affiliate thereof (as defined in General Condition 14(4) in Annex 3 to this Agreement) in operating, repairing or maintaining the Pipeline and any land or substrata on, in, under or over which it is laid other than the BG Predictable Operating Costs and excluding any such costs or expenses relating to the BGE Pipeline. The Customer shall be entitled on reasonable prior notice to inspect those records of British Gas reasonably sufficient to verify the foregoing."

The Matrix or Landscape

13. There was some debate between counsel as to what the judge was finding as far as matrix was concerned. Mr Sumption suggested that the judge sometimes slipped from describing matrix into describing as matrix what was, in essence, her view as to the construction of the GSA. Lord Grabiner drew attention to what he would suggest were inconsistencies between some parts of the judge's judgment e.g. he suggested there was a difference in her view depending on whether she was dealing with construction or whether there should be a right to vary and pointed to paragraph 82 as compared with paragraph 51.
14. Certainly the judge intended a finding of matrix in paragraphs 51 52 and 53 which I should quote:-

"51. Mr. McCaughran on a number of occasions submitted that "the purpose" of the provisions relating to the Transmission Charges was to allow the seller to recover "costs of and associated with the transportation of gas to Ballylumford". I accept that Clause 2.1(b) of the GSA envisaged that the buyer would pay "a charge for the costs of … gas transportation along the Pipeline" (my emphasis), which suggests that such charge will cover all the costs of transportation. I also accept that the legitimate factual matrix evidence of the commercial background to the GSA shows that the commercial object, or aim, of the transaction at that time was that the buyer should pay all the costs of and associated with the transportation of the gas along the Pipeline to Ballylumford, and that, in effect, the seller, then British Gas, would be able to pass through all its costs, or its Affiliate's costs, of operating the Pipeline to the buyer. I also accept that, on the commercial state of play at the time of the conclusion of the GSA, the provisions of Annex 5 were designed to ensure that the buyer would pay for all of the costs of and associated with the transportation of the gas, and that they were not designed to ensure that the transportation costs were to be shared between the buyer and the seller.

52. The factual matrix evidence that shows this was the following. The GSA was, as I have already said, based upon the standard form of LTI contract in use in 1992, namely LTI3. Under this form of contract, all purchasers of gas from British Gas paid the same commodity prices. The provisions of Annex 5 were specifically negotiated to cover the additional costs of transporting the gas from Great Britain to Ballylumford. The Transmission Charges were not designed to provide a subsidy to PPL in relation to the commodity prices. As Mr. Richard Souchard, one of PPL's witnesses, who had been UK Downstream Asset Manager within BG Group Plc with responsibility for PPL, said: "The transmission charging formula was there specifically to ensure that the costs of capital and the costs of operation of the pipeline were recovered". The AMC formula contained in Annex 5 provides for the recovery of a variety of different heads of cost, both capital and operational. They go together to form the Base Monthly Charge or "BMC". In addition, Annex 5 provided for the payment of BGUOC. The "basket" of recoverable costs provided for in Annex 5 represented all of the costs of and associated with the transportation of the gas from Great Britain to Ballylumford. It is correct, as Mr. Onions submitted, that the recoverable capital costs were subject to a cap in the region of £127.5 million (index linked). However, in reality, on the basis of the evidence before me, at the time of the inception of the GSA, there was no significant risk that British Gas or PTL would fail to recover the capital costs of the project.

53. However, the reality was that the GSA, as Mr. Onions pointed out, closely defines what may be recovered as "Transmission Charges" and reflects an understandable commercial deal entered into in 1992, when the Pipeline was to be constructed, to enable recovery of the costs of constructing, operating, repairing or maintaining the Pipeline as specific Transmission Charges to be paid by the buyer, PPL, to the seller, in respect of the seller's operation, or its Affiliate's operation, of the Pipeline. This was in fact reflected in the extension letter, under which PPL had to continue to pay the Transmission Charges for a further period after the end of the gas supply period to enable the recovery of the costs of construction and operation for the 15 year period. This was also accepted by Mrs. Griffith. In my judgment there is no evidence, that can be properly characterised as factual matrix evidence, that provides any support for the contention that it was irrelevant for the purposes of BGUOC whether the seller, or its Affiliate, was the operator of the Pipeline, or supports the proposition that the seller could recover costs which he had to pay by way of third party payments to the actual operator of the Pipeline, in circumstances where neither the seller, nor its Affiliate, was the operator of the Pipeline. Some of the Claimants' factual witnesses gave evidence to the effect that they had such a subjective belief. But subjective belief is not within the ambit of legitimately available factual matrix material: see per Jonathan Parker J in Philip Collins Ltd v Davis (supra) at 823. The clear inference that in my judgment can be drawn from the words used in the GSA and the surrounding circumstances in 1992 was that the purpose of the Transmission Charges was to enable the seller to recover the capital costs of the construction of the Pipeline and the seller's costs of operating it. Indeed, even the Claimants' witness, Mrs. Valerie Griffith, Commercial Manager within BGTL responsible for managing the GSA, accepted that the charges were designed for this purpose. She said: "That is all that was contemplated at the time, the initial PTL pipeline." "

15. It is right also to quote para 82 although at this stage she was dealing with the right to vary:-

"82. In my judgment, and despite Mr. Onions' skilful and superficially persuasive arguments, the simple reality is that, as result of Postalisation, the seller cannot charge the buyer in respect of the costs of gas transportation along the Pipeline; the seller is required, as a result of the modifications to the operator and supply licence and the Transportation Code, to pay a postalised tariff to the operator (PTL). Thus prior to postalisation, BGTL was liable to pay to PTL, pursuant to the Transportation Code, Licence Charges, which included the AMC (which itself included two elements of operational cost) and Licensee Unpredictable Operating Costs). As part of the measures taken upon the introduction of postalisation, BGTL's Supply Licence has been modified, so that it is no longer required to pay the AMC, together with Licence Charges but is, instead, required to pay the postalisation charges. The Transportation Code has been similarly amended so as to require shippers, including BGTL, to pay the postalisation charges. Absent variation, the result would be that the seller would end up shouldering a large proportion of the transportation costs, which commercially would be a wholly different bargain from the one which the parties entered into in 1992, or indeed, 1997. The result in my judgment is that, in reality, because of Regulatory Action BGTL/Centrica can no longer exercise their right to be paid "a charge for the costs of … gas transportation along the Pipeline" as provided in clause 2.1(b) of the GSA, as calculated in accordance with the provisions of Annex 5, because the nature of the costs which they have in fact incurred are materially different. It follows that I accept Mr. McCaughran's submission that the recovery of Transmission Charges by the seller, and the payment of such charges, are a "transaction" "contemplated" by the GSA, within the meaning of the Regulatory Action definition, and that the transactions thereby contemplated are not limited to the sale and transportation of gas."

16. It seems to me that it is clear that the judge was of the view that, as at the date when the agreement was entered into, it was the intention of the parties that BG would recover from PPL what it cost BG to transmit the gas along the pipeline i.e. what it cost PTL, its affiliate, to operate, repair and maintain the pipeline. Annex 5 drafted in 1992 was intended to produce that result and the reason for the detail was to protect both PPL and BG so that there could be no doubt as to the basis for calculating what it was costing BG or its affiliate.
17. The Transport Agreement as between BG and PTL came into existence after the GSA. PPL was not a party to this agreement and its terms thus cannot in anyway cast light on what had been the intentions of BG and PPL when they entered into the GSA. As a matter of fact, however, that agreement contained terms that mirrored those in Annex 5; we were told that the back to back was not precise but the non-reflected area is of no materiality to the essential point relating to the costs of operating the pipeline. The Transport Code when that was produced in 2001 again adopted the relevant parts of the previous Transport Agreement.

Construction and MPPs

18. I shall from this stage refer to BG as the supplier, even after the GSA was assigned to Centrica, and, although the judge dealt at greater length than I have with the surrounding facts and details, I do not believe it is necessary to go further than I have in order to set the scene for the construction arguments.
19. The submissions of Mr Sumption I would summarise in this way. (1) the judge was right in her view that it was the common intention that BG would recover all the costs of transmission reflected in both paragraph 51 (when dealing with matrix) and paragraph 82 (when she was dealing with variation), but she then construed the provisions of the contract in a black letter way failing to give effect to that common intention; (2) she failed to carry forward her own view that clause 2.1 was providing for all costs to be recovered and failed to recognise the importance of that clause; (3) she failed to appreciate that in giving effect to that intention the draftsman had made clear that it was BG's, the seller's costs and not the costs of the affiliate PTL with which the agreement was concerned; (4) the terms of the Transport Agreement between BG and PTL, and indeed the terms of the Code when it came in, mirrored Annex 5 so far as transportation costs were concerned, so the structure was that PTL were charging BG for operating, repairing and maintaining the pipeline and BG was charging PPL the costs that BG was incurring; (5) it was not a term of the GSA that BG could only transmit gas through a pipeline operated maintained or repaired by itself or by an affiliate; vicarious performance was recognised as being possible by the assignment provisions supported by the side letter dated 1 April 1992; thus part performance, e.g. a repair, could be subcontracted and there was no logic in suggesting that complete performance could not be subcontracted; (6) the true legal analysis was that BG had subcontracted their obligation to operate the pipeline to PTL; (7) Annex 5 was to give effect to clause 2.1 and not the other way round; (8) he did not suggest that clause 2.1 operated without regard to annex 5; in his submission paragraph 11 enabled BG to recover as BGUOCs all costs and expenses reasonably incurred in employing any third party, an affiliate or otherwise, to operate, maintain and repair the pipeline; (9) support for that construction was gained (i) from the fact that the draftsman felt obliged to exclude "any such cost or expenses relating to the BGE pipeline" from BGUOC; those costs he pointed out were costs payable to BGE under paragraph 6 of Annex 5, so he submitted the draftsman was recognising that costs payable to third parties for operating a pipeline would have otherwise been within the BGUOC as defined by paragraph 11; (ii) it was BG's costs (not an affiliate's costs) that were to be reimbursed; thus condition 3 of part 1 of Annex 5 made it clear that BGUOC was intended to cover "relevant expenditure incurred from time to time by BG"; (10) the point that his construction would render the word affiliate otiose, he answered by submitting that affiliate was simply there to cover a service company which incurred the costs on behalf of BG; that was why inspection rights were given to PPL of BG (which would cover a service affiliate), and no rights were given to PPL to force BG to use disclosure rights it might have as against a third party e.g. PTL.
20. Mr Sumption also suggested that if his construction were not accepted the result would lead to absurdity; for example if Lord Grabiner's affiliate point were right, since that only affects the recoverability of BGUOCs, that would allow for recovery of AMC and predictable costs by BG from PPL but not BGUOCs for which result there is simply no logic.
21. He referred to the dicta of Lord Reid in Schuler AG v Wickman Machine Tool Sales Limited [1974] AC 235 at 251, where he said:-

"The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result, the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear."

22. He referred also to Steyn LJ in Arbuthnot v Fagan [1996] 1 Lloyd's Reinsurance Law Reports at 140, where he said:-

"I readily accept Mr Eder's submission that the starting point of the process of interpretation must be the language of the contract. But Mr Eder went further and said that, if the meaning of the words is clear, as he submitted it is, the purpose of the contractual provisions cannot be allowed to influence the Court's interpretation. That involved approaching the process of interpretation in the fashion of a black-letter man. The argument assumes that interpretation is a purely linguistic or semantic process until an ambiguity is revealed. That is wrong. Dictionaries never solve concrete problems of construction. The meaning of words cannot be ascertained divorced from their context. And part of the contextual scene is the purpose of the provision . . ."

23. He submitted that his construction prevented an unreasonable and non-commercial result and should be adopted.
24. Lord Grabiner's submissions can be summarised as follows. (1) there is nothing to support the view that clause 2.1 has some dominant position, indeed clause 2.6 demonstrates that the bargain between the parties was simply for PPL to pay transmission charges calculated in accordance with Annex 5; (2) when the contract was made it was the intention that BG would arrange for its affiliate, PTL, to construct and operate the pipeline, and Annex 5 accordingly, on its plain words, allowed for BG to recover the costs reasonably incurred by its affiliate; (3) he accepted that there could be part delegation, and he accepted that costs paid to subcontractor repairers could be recovered, but that was because such costs would be being incurred by the operator; (4) if BG or its affiliate chose to delegate the whole of the operation of the pipeline to a third party that was up to them but Annex 5 would not allow recovery in that the costs of operating the pipeline would not be being incurred by BG or an affiliate; (5) leaving aside the affiliate point, he submitted that the contract could still work in that, even if the charge as between PTL and BG were on some basis quite different from that set out in Annex 5, as between BG and PPL. BG could still charge on the basis of Annex 5; the Transport Agreement was entered into some time after the GSA and without PPL being a party and could thus have provided for any basis of charging between PTL and BG, but Annex 5 would still have governed the position as between BG and PPL; (6) there was an open offer to treat PTL as an affiliate which would allow the contract to work applying Annex 5; there was no reason to think that the information required to calculate as per Annex 5 would not be forthcoming from PTL even if PTL no longer charged on the same basis; (7) the important point to appreciate was that clause 2.1 did not simply allow a pass through of costs; this was emphasised by 2.6; what Annex 5 was concerned to do was to define the circumstances in which operating costs could be passed through and the price that PPL would pay to BG for transmission of the gas; (8) he emphasised the distinction in language between paragraph 6, dealing with the BGE pipeline, and paragraph 11; paragraph 6 expressly covered "any charges of whatever nature payable by BG" to be contrasted with "all costs and expenses . . . incurred in operating . . .". In any event Lord Grabiner submitted MPPs were not the costs reasonably incurred in operating this pipeline, they were a charge assessed by reference to many pipelines; in addition balancing and scheduling charges were not costs incurred in operating the pipeline, they were charges of a quite different nature.
25. One can of course see from a totally literal point of view the force in Lord Grabiner's submissions. But he had to make certain submissions and/ or concessions which need some examination if the GSA was to work as a bargain which the parties were likely to have contemplated commercially and/or if his construction was the true construction. First he submitted that although PPL did not take the point in 1997, once PTL was no longer an affiliate, BG in law no longer had any entitlement to BGUOC, even if PTL was charging on the basis of the schedules back to back with Annex 5 and BG was charging in accordance with Annex 5. It retained the right to charge the AMC but lost any right to charge BGUOCs. Lord Grabiner accepted that produced an odd result. That it lacked commercial reality is confirmed by the fact that PPL ultimately offered openly to treat PTL as an affiliate. A concession or open offer cannot affect the proper construction of the contract and, once it is accepted that BG was not in any way in breach of contract in using a non-affiliate to operate the pipeline so as to transmit the gas, it is much more likely that the GSA was meant to allow for the recovery of BGUOC, at the very least to the extent that PTL and thus BG was charging on the basis reflected in Annex 5.
26. Second, Lord Grabiner submitted that if the charging basis as between BG and PTL, even while PTL was an affiliate, had changed so that there was no longer a back to back with Annex 5, still BG would have been able to go on charging PPL in accordance with Annex 5. Thus if PTL as the subsidiary had agreed with BG to reduce their charges by one half, on Lord Grabiner's submission BG would still have been entitled to charge PPL the full Annex 5 price. It seems to me that it is most unlikely that, if as between PTL and BG a change in the charging arrangements had produced a lower price, PPL would be making the submission through Lord Grabiner that they did. Condition 3, which talks of "expenditure incurred ...by BG", and the wording of paragraph 11, which talks of "costs and expenses reasonably and properly incurred by BG or any affiliate….", would dictate a different result. Furthermore if PTL were charging on a different basis, without a concession from PTL, BG would have little basis on which to make the calculation in accordance with Annex 5 and PPL would have little basis on which to challenge the reasonableness of the Annex 5 calculations.
27. As indicated, I accept that at first sight the words of paragraph 11 seem to be contemplating the actual costs to BG or an affiliate acting as operator. The judge found that prior to entering into the GSA there was no suggestion and no contemplation that the pipeline to be constructed by PTL would be operated other than by BG or PTL as an affiliate of BG. This may well explain the language used but, as I see it, it assists neither one way or the other unless, which has not been suggested, it was a term of the contract that BG could not arrange for the operation of the pipeline other than through itself or an affiliate. The question so far as construction is concerned is whether the words prevent BG arranging the operation of the pipeline through a company not an affiliate, and whether they provide for charges to be made if they are allowed to do so.
28. In my view, as the assignment provisions demonstrate, BG was entitled to arrange for the pipeline to be operated via some entity other than an affiliate. Once one reaches that position, and once PTL was no longer an affiliate, then it is no distortion of the words to recognise that it was no longer BG or through an affiliate but BG through its subcontract with PTL who was operating the pipeline. If one then asks what costs and expenses BG were incurring in operating the pipeline from 1997, they were the costs and expenses that BG were paying PTL.
29. For the period 1997 up until 2004 it so happens that PTL's charge was what it had always been and thus BG could go on passing that charge on to PPL as per Annex 5, but the correct legal analysis is that PTL were the subcontractor and the costs being incurred by BG were what PTL was charging BG.
30. That the above is the correct construction does, in my view, receive strong support from certain matters relied on by Mr Sumption. First, the exclusion in paragraph 11 of BGE. Lord Grabiner seemed to argue that because "such costs" was a reference back to the costs of "operating, repairing etc" that in some way Mr Sumption's argument was weakened. I am unpersuaded that the exclusion is otherwise than a strong pointer to the draftsman recognising that payments to a third party for operating a pipeline would, without the exclusion, have been BGUOCs. Second, the point emphasised by Mr Sumption, that it is BG's costs with which the GSA is concerned as expressly recognised in many provisions including condition 3 of Part 1, adds further support. Third, if the affiliate point were right, it leads to BG being able to recover AMC, and predictable costs from PPL but being unable to recover unpredictable costs – that makes no sense.
31. This analysis also seems to me to provide the answer to the question whether balancing and scheduling charges were BGUOCs. These charges are described in detail in paragraph 92 of the judge's judgment where she quotes from the Updated Case Memorandum. Briefly described, balancing charges are charges or credits which arise if there is a mismatch between the gas allocated to a shipper at the entry point and the gas allocated at the relevant exit point. Scheduling charges are payable if on any day the amount of gas allocated to a shipper at its exit point is more or less than it should be. As the judge shows, PTL in the result, when the position of all shippers is taken into account, was intended to end up in a neutral position but, that said, so far as PTL was concerned they would be making the charges or granting a credit to individual shippers. Once the Transport Code required PTL to make those charges to BG, it seems to me to be accurate to describe them as cost and expenses incurred by BG, i.e. payable to its subcontractor PTL in operating the pipeline.
32. I now turn to MPPs, a method of charging forced on PTL in its relationship with BG. In my view Mr Sumption's analysis still holds good. BG were still employing PTL as a subcontractor to operate the pipeline and the costs and expenses incurred by BG in operating the pipeline were and are what PTL was or is charging. The fact that MPPs are calculated by reference to a number of pipelines is not to the point. What BG is claiming from PPL is the costs and expenses in operating the particular pipeline.

Variation

33. Once I take the view on construction that I have it is quite difficult to put myself back into a state of mind where somehow the matrix is as it was but the result on construction is different. I am accordingly going to deal with this aspect very shortly.
34. The terms relevant to variation are the following:-

"Annex 5

6.(a) Notwithstanding anything else contained or referred to in this Agreement or elsewhere and notwithstanding any prior agreement or understandings between the parties hereto and notwithstanding any representations made by or to either of them or by or to any third party with the intention or expectation that either party hereto would act thereon, all Transmission Charges have been calculated on the basis of those assumptions set out in Part 5 of this Annex.

(b) If any of the assumptions in paragraph (A) of Part 5 shall at any time during the currency of this Agreement prove incorrect for whatever reason, British Gas shall be entitled from time to time to vary the Transmission Charges by such amount or amounts and generally in such manner as it may consider reasonably appropriate to reflect the circumstances at the date of variation. Any such variation may have retrospective effect. "

Part 5 - Assumptions

5. That no Regulatory Action will occur and there will be no changes in and no introduction of any legislation, statutory instrument, order or code of practice (whether or not having statutory effect) regulating or in any way affecting the planning, design, construction, laying, burying, testing, commissioning, certification, approval or operation of the Pipeline or any part thereof which would or might affect the total cost of its construction (including the Capital Costs) or any of the costs of operating the Pipeline or any part thereof or any component of any of the costs referred to in this paragraph: provided that (for the avoidance of doubt) this paragraph shall not of itself entitle British Gas to vary the Transmission Charges by reason only of anything relating to the supply of gas through the Pipeline to any person in Northern Ireland other than the customer."

35. The definition of Regulatory Action is contained in clause 1 and provides as follows:-

" "Regulatory Action" means any order of a court of competent jurisdiction or any order, decision or conclusive view made, given or expressed (save as a direct and necessary consequence of Wilful Default (as defined in General Condition 10(11)) of British Gas) by a competent governmental or regulatory authority or agency or an enactment of a legislative body:

(a) which materially prohibits or restricts any or all of the transactions contemplated hereby or requires the Substantial Completion Date or the Start Date to be delayed beyond the dates referred to in Special Condition 6; or

(b) which prohibits or restricts or materially affects the design or construction or laying or commissioning of the Pipeline; or

(c) which would materially prohibit or restrict the operation of the power station at the Premises; or

(d) in consequence of which, either of the Parties would incur fines or a liability in damages were this Agreement to be performed in accordance with its terms."

36. As I understand it for this exercise one must assume that Lord Grabiner's argument on construction has succeeded in total, i.e. that it is only while BG or its affiliate is actually operating the pipeline itself that BGUOCs are recoverable at all. There has not been suggested any possible halfway house as to a basis on which BG might have recovered BGUOCs under Annex 5 after 1997, save by virtue of a concession that PTL could be treated as an affiliate, a concession that cannot affect the proper construction of the GSA.
37. The judge was of the view that when construing the presumption in paragraph 5 of Part 5 "Regulatory Action" was divorced from the remainder of paragraph 5 and thus she found that although if the remainder of paragraph 5 applied no variation would be possible, that the government action had restricted the transactions contemplated by the GSA.
38. If compelled to accept Lord Grabiner's construction, I do not think the question whether the judge was right or wrong on Regulatory Action or right or wrong as to whether it is divorced from the rest of paragraph 5 arises. There is, as it seems to me, a complete answer to the variation argument if the argument on construction is right. It is not postalisation charges which have produced the result that BGUOCs cannot be recovered, it was the demerger.

Conclusion

39. For the reasons I have endeavoured to give, I would allow the cross-appeal on construction holding that MPPs and balancing and scheduling charges are BGUOCs recoverable under the GSA from PPL. If it had arisen I would have been inclined to allow the appeal on variation.

Lord Justice Longmore :

40. It is convenient to examine the position as at the demerger of British Gas when PTL became an independent entity (and thus no longer an affiliate of British Gas) in or about 1997. In fact invoices continued to be rendered requiring payment of AMC and BGUOC from PTL on the same basis as before and PPL continued paying those invoices. The logic of Lord Grabiner QC's argument was, however, that as from demerger neither British Gas nor any affiliate "incurred costs and expenses …. in operating, repairing and maintaining the pipeline". That is because, as from the relevant date, though PTL was still operating, repairing and maintaining the pipeline, it was not an affiliate of BGTL/Centrica.
41. This cannot be right. It may (or may not) have been the expectation of the parties in 1992 that either British Gas or one of affiliates would be operating the pipeline for the foreseeable future but there was no warranty or undertaking that it should do so. Lord Grabiner's assertion that the contract would then have to be re-negotiated, if BGUOC were to continue to be re-coverable, was certainly not PPL's position at the time and carries it with the further assertion that if PPL declined to re-negotiate they would never thereafter have to pay the BGUOC part of the transmission charges.
42. As a consequence of the demerger British Gas were no longer the supplier under the GSA but BGTL/Centrica had been substituted and British Gas is to be read as BGTL/Centrica in that contract. The argument favoured by my Lord, if I have correctly understood it, is that British Gas (and now BGTL/Centrica) still incurs costs and expenses in operating repairing and maintaining the pipeline because it is paying a sum to PTL which, as it happens, is the cost of operating the pipeline because PPL's liability to pay for unpredictable operating costs is confined to the costs and expenses of operating the pipeline under the back to back provisions of the Transportation Agreement between BG/BGTL/Centrica on the one hand and PTL on the other hand. I have some respectful difficulty with that view because BG/BGTL's costs and expenses in these circumstances are not strictly "costs and expenses incurred in operating the pipeline" but "costs and expenses incurred in procuring the operation of the pipeline" which is, to my mind, a somewhat different concept.
43. I would adopt a rather broader approach. The parties cannot have intended that, on denationalisation, the BGUOC part of the price would no longer be payable. In relation to BGUOC Annex 5 was intended to delineate that part of the transportation charges which were payable while BG or (more likely) an affiliate was in fact operating the pipeline. That would then prevent an affiliate such as PTL charging an artificially high price for the cost of transmission which for inter-company reasons it might wish to do. It would also mean that if, for inter-company reasons, the affiliate decided to charge an artificially low price (or perhaps nothing at all – and why should it charge its own parent?), the cost of operating, maintaining and repairing the pipeline would always be chargeable to PPL.
44. If, however, BG or its, affiliate ceased to operate the pipeline, the BGUOC would have to be calculated in some other way. If the contract were to have no clause explaining how that was to be done, that might be a difficulty. But the underlying position is clear. The essence of the obligation is set out on page 4 of the Agreement:-

"Now this Agreement witnesseth that British Gas hereby agrees to supply and the customer hereby agrees to take and pay for gas and to pay transmission charges in accordance with and subject to the Special Conditions below and the provisions of the Annexes to this Agreement."

The special conditions are then immediately set out and, after the conditions precedent to the agreement coming into force have been set out in clause 1, the next clause (clause 2) sets out the price to be paid:-

"The customer shall pay to British Gas

(a) a commodity charge for gas supplied under this Agreement (referred to as the Modified Reference Price) and

(b) a charge for the costs of connection to the national transmission system of British Gas and gas transportation along the pipeline (referred to as the Transmission Charges)"

Clauses 2.2 to 2.5 deal with Modified Reference Price and clause 2.6 concludes the clause by stating

"The Transmission Charge shall be calculated and paid in accordance with Annex 5 and General Condition 4."

45. Lord Grabiner relies on clause 2.6 to submit that if any provision of Annex 5 in relation to any particular part of the charge becomes inoperative, that particular part of the charge is no longer payable. But that is not in my judgment, the true position. Clause 3 of Part I of Annex 5 provides:-

"BG Unpredictable Operating Costs shall be calculated without variation in accordance with the relevant expenditure incurred from time to time by British Gas."

It is, however, then the definition of BGUOC on which Lord Grabiner relies to assert that because postalisation charges are not costs or expenses incurred in operating, maintaining and repairing the pipeline, those charges cannot be recoverable. He further submits that PPL are entirely happy to continue to pay the Actual Monthly Charge as previously calculated and the BGUOC as previously calculated on the basis the PPL are prepared to continue to treat PTL as an affiliate of BGTL/Centrica although they are not in fact such an affiliate. Then PTL's costs of operating the pipeline will still be recoverable; but PPL are not prepared to pay postalisation charges.

46. This "offer" or "concession" exposes the fatal flaw of Lord Grabiner's argument. The agreement can only be made to continue to work by "pretending" that PPL is still an affiliate. PPL would prefer to pretend that the contract is still workable in order to avoid the unattractive (but logical) consequences of the argument namely that PPL need in law pay nothing after demerger by way of the BGUOC part of the Transmission Charges. The "concession" recognises that this could never have been the parties' intention. But if that was not the parties' intention, the only intention can have been that in accordance with clause 2(1)(b) PPL as customer should continue to pay the costs of transmission to BG/BGTL.
47. These costs are now the postalisation charges and are, therefore, payable by PPL. For these reasons I agree with my Lord that the judge's order should be set aside and that Centrica's cross-appeal should be allowed. I also agree with what my Lord has said about the question of variation.

Lord Justice Hughes :

48. I respectfully agree with both my Lords that Centrica succeeds on the construction point, and that in consequence the judge's order should be set aside and Centrica's cross appeal allowed.
49. The only point of difference in the reasoning adopted by my Lords is identified in paragraph 3 of Longmore LJ's judgment. On that point, I agree with Waller LJ. The critical words for construction are in the definition of BGUOC at Annex 5, Part 3, para 11, viz:

"all costs and expenses reasonably and properly incurred by British Gas….in operating, repairing or maintaining the pipeline…"

50. Those words are, as it seems to me, quite wide enough to cover payments reasonably made by British Gas (now Centrica/BGTL) to a third party for operation, repair or maintenance of the pipeline. For my part, I would regard the considerations set out by both of my Lords in their judgments as supporting the conclusion that that must be what the parties meant them to mean.