Total Gas Marketing Ltd v. ARCO British Ltd and Others

The House of Lords construed a provision in a long-term gas sale agreement (Clause 2.8 of the Draft Agreement) making the seller's entry into an Allocation Agreement a "condition precedent" to the parties' obligations to deliver and accept gas. The court held that this contingent condition was not a promissory term nor a condition precedent to the coming into existence of the contract but was fundamental to its operation.

On construction of the contract read as a whole, and having regard to the funnel mechanism in Clause 2.1 that fixed the First Delivery Date, the House concluded that the condition had to be fulfilled by the First Delivery Date selected by the seller (or, if none were selected, by the residual date), and that non-fulfilment by that date operated to terminate the agreement rather than merely suspend performance. The court rejected the seller's submission that the contract should remain suspended pending either a reasonable further period (as suggested by the dissent below) or until discharge by frustration.

The dispute concerned three near-identical Letters of Agreement under which ARCO (and two co-licensees) agreed to sell and Total agreed to buy gas from the Trent field. The Letter provided that the Fully-Termed Agreement would include Clause 2.8 of the Draft Agreement, which made the seller's becoming party to an Allocation Agreement a "condition precedent" to the operation of the sale obligations. Clause 2.1 contained a funnel mechanism permitting the seller to select a First Delivery Date within a specified window (15 September to 15 December 1996), with consequences fixed from that date.

Procedural history:

• High Court (Jonathan Parker J.): dismissed Total's claim and found for the sellers.
• Court of Appeal (Peter Gibson L.J., Otton L.J.): allowed Total's appeal (Nourse L.J. dissenting) and declared Total not bound by the agreement.
• House of Lords: appeal by ARCO dismissed.

Nature of the claim: Total sought a declaration that it was not bound by the Letter Agreement because the condition precedent (ARCO's entry into the Allocation Agreement) had not been satisfied by the First Delivery Date.

Issues framed:

• Whether the clause making entry into the Allocation Agreement a "condition precedent" required fulfilment before the First Delivery Date such that the agreement terminated automatically if not fulfilled.
• Alternatively, whether non-fulfilment merely suspended obligations for some further period (for example a reasonable time, the residual date of 15 December 1996, or a period of 12 months) or left termination to the doctrine of frustration.

Court's reasoning: The Lords analysed the terminology (promissory v contingent conditions) and the contract as a whole, emphasising the centrality of the First Delivery Date to the contract's operative regime. They held that the Allocation Agreement condition was a contingent condition fundamental to the operation of the contract and that, given the funnel mechanism and the role of the First Delivery Date in fixing many operative rights and obligations, the natural construction required fulfilment by the First Delivery Date chosen by the seller. The House rejected the seller's arguments that the agreement should remain suspended pending frustration or a lengthy further period, and also rejected the Court of Appeal dissent that a reasonable further period after the First Delivery Date should be implied.

Subsidiary findings: The court found that the reasonable endeavours obligation to attempt to become party to the Allocation Agreement continued after 1 March 1996 but concluded that such implied obligation would, to be workable, terminate when the seller selected the First Delivery Date. The court also found that Clause 2.7.2 (a 12-month termination right for failure to deliver after supplies had commenced) addressed a different factual context and did not support allowing a 12-month suspension before termination.

Appeal dismissed. The House held that the seller's obligation to become party to the Allocation Agreement was a contingent "condition precedent" to the operation of the contract; because the First Delivery Date fixed the operative start of the contract regime, the condition had to be fulfilled by that date (the date fixed by the seller). Non-fulfilment by that date therefore terminated the agreement rather than merely suspending performance or leaving the matter to frustration.

High Court (Jonathan Parker J.): claim by Total dismissed. Court of Appeal: majority (Peter Gibson L.J., Otton L.J.) allowed Total's appeal and declared Total not bound; Nourse L.J. dissented. House of Lords: appeal by ARCO dismissed ([1998] UKHL 22, 20 May 1998).