Scottish Power Plc v Britoil (Exploration) Ltd

A long-term gas-sale contract must be construed as a whole. Detailed nomination, take-or-pay and seller-reservation provisions may limit the seller’s ability to dispose of gas, even where oil production necessarily produces gas. A seller may sell gas to third parties under clause 5.1(11) only where the buyer has nominated gas for delivery but fails to take it because of breach or force majeure. Clause 5.1(10) confers no wider power of sale. A quia timet injunction may be refused where future breaches are uncertain, damages can be assessed when breach occurs, and an injunction would be oppressive, particularly where equivalent gas can be contractually provided.

Scottish Power plc, the buyer, appealed from a decision of Colman J in the Commercial Court concerning five substantially identical 25-year contracts for gas from the Andrew field. The sellers contended that clauses 5.1(10) and 5.1(11) permitted them to sell gas to third parties in wider circumstances than the buyer accepted.

The appeal concerned the construction of those clauses, read with the contractual provisions governing delivery nominations, daily and annual quantities, take-or-pay obligations, production and disposal. It also concerned whether the buyer should receive injunctive relief to restrain threatened sales. The central issues were the scope of the sellers’ contractual right to sell or otherwise dispose of gas and whether damages would be an adequate remedy.

1. Appeal allowed. The sellers were not entitled to sell Andrew-field gas to third parties except to the extent that the buyer had failed to take gas nominated for delivery in accordance with the contract.
2. The contracts were construed as a whole. Clauses 3.1 and 3.3, Article 5, Article 6 and the take-or-pay provisions showed that gas produced from the field was to be used for delivery to the buyer or for an Article 5 purpose. Relevant surrounding circumstances included the physical relationship between oil and gas production, limited gas storage, and the commercial value of a long-term assured supply. The buyer’s negotiating letter was excluded because it formed part of negotiations and contained a non-binding assurance.
3. Clause 5.1(11) was confined to gas nominated or otherwise available for delivery which the buyer failed to take because of breach or force majeure. It did not apply merely because the buyer made a permitted zero nomination or took less than the Daily Contract Quantity without breach.
4. Clause 5.1(10) was the companion to clause 5.1(11) and could not be read so broadly as to make clause 5.1(11) unnecessary. “Operational requirements” meant requirements connected with operating machinery for producing and selling gas, not commercial requirements to produce more oil and consequently more gas. On the language of the clause, “otherwise dispose of” did not include sale to third parties. Robert Walker LJ additionally treated the phrase as an ejusdem generis expression, referring to Larsen v Sylvester [1908] AC 295.
5. A quia timet injunction was refused. Future breaches, their timing and quantities were uncertain; damages could be assessed when a breach occurred, although quantification might be difficult; and an injunction could be oppressive because interruption of oil production might cause losses greatly exceeding the buyer’s loss. An absolute contractual promise to provide an equivalent quantity of gas would provide adequate protection.

Otton LJ agreed with Staughton LJ’s reasons and would grant the declaration sought. Robert Walker LJ largely agreed. Leave to appeal was refused.

• Court of Appeal (Civil Division): [1997] EWCA Civ 2752 allowed the appeal, granted the declaration sought and refused injunctive relief. Leave to appeal was refused.
• Queen’s Bench Division, Commercial Court: Colman J construed clauses 5.1(10) and 5.1(11) more broadly and gave the sellers most, but not all, of what they sought. The Court of Appeal differed on the construction of those clauses.