Total Gas Marketing Ltd v. ARCO British Ltd and Others

A contingent condition does not invariably suspend contractual obligations until the specified event occurs. Its effect depends on the language, scheme and commercial context of the contract.

Where performance of a long-term supply contract was conditional upon the seller becoming party to an indispensable allocation agreement, the condition had to be fulfilled by the operative first delivery date. The selected date was central to the parties’ rights and displaced the residual date available under the contractual notice mechanism. Non-fulfilment by that date discharged the contract, despite the absence of an express termination provision.

The appellants were licensees of a North Sea gas field. They contracted to sell gas to Total under identical long-term agreements. Performance was conditional upon the seller becoming party to an allocation agreement needed to attribute gas passing through a multi-user terminal.

The seller selected 31 October 1996 as the First Delivery Date but had not become party to an allocation agreement by that date. Jonathan Parker J dismissed Total’s claim for a declaration that it was no longer bound, holding that performance was suspended. The Court of Appeal, by a majority, reversed that decision and declared that Total was not bound.

The issue before the House was whether the condition had to be fulfilled by the First Delivery Date, so that non-fulfilment discharged the contract, or whether the obligations remained suspended for some later period.

1. Appeal dismissed unanimously. Lord Slynn of Hadley delivered the leading speech. Lord Nolan and Lord Hope of Craighead agreed with his reasons. Lord Steyn was in substantial agreement, subject to a different view about the relevance of land-sale authorities. Lord Hutton reached the same conclusion in a separate speech.

2. Per Lord Slynn, the distinction between promissory and contingent conditions had to be preserved. Nevertheless, non-fulfilment of a contingent condition does not invariably suspend contractual obligations. Whether obligations are suspended or the contract ceases to bind depends upon the proper construction of the contract as a whole.

3. Entry into the allocation agreement was fundamental because gas could not be delivered through the terminal without it. The contractual descriptions “conditional” and “condition precedent” strongly indicated that this was a contingent condition governing the obligation to deliver and take gas. An express statement that non-fulfilment would terminate the contract was unnecessary.

4. Per Lord Slynn and Lord Hutton, the First Delivery Date was central to the contractual scheme. It fixed the commencement of delivery and numerous related rights, notices and accounting obligations. The agreement contained no mechanism for altering that date or regulating an indefinite suspension. Clause 2.7.2, permitting termination after 12 months without deliveries, addressed the different situation in which an allocation agreement existed and delivery obligations had arisen.

5. Per Lord Steyn, long-term or relational contracts attract no special rules of interpretation. The contractual text, read against its relevant context, remained controlling. The commercial need for flexibility could not justify a construction that deprived “condition precedent” of effect and exposed the buyer to prolonged uncertainty.

6. Once the seller selected 31 October 1996, the residual date of 15 December 1996 fell away. A further reasonable period after the selected date would be uncertain and unsupported by the contract. The condition therefore had to be fulfilled by 31 October 1996. Since it was not fulfilled, Total was no longer bound by the agreement.

1. House of Lords: Dismissed the sellers’ appeal and affirmed the Court of Appeal’s declaration that Total was no longer bound by the agreement.

2. Court of Appeal: By a majority, Peter Gibson LJ and Otton LJ allowing the appeal and Nourse LJ dissenting, discharged the first-instance order and declared that Total was not bound by the Letter Agreement and attached Draft Agreement.

3. High Court: Jonathan Parker J dismissed Total’s action. He held that non-fulfilment of the condition suspended performance rather than automatically terminating the agreement.