Esso Exploration & Production UK Ltd. v Electricity Supply Board

A contractual price-review notice is a condition precedent to the operation of machinery leading to arbitration. The requirement that a party be “reasonably satisfied” that the contractual threshold has been met is objective: the party must be satisfied on reasonable grounds. A notice given without reasonable grounds is invalid and ineffective, so no arbitrable dispute arises.

Where a contract defines a comparator as the market price for goods currently being supplied on comparable terms, the expression refers to the actual market price under comparable contracts, not a notional price derived from spot or short-term prices. The temporary absence of an active market does not justify rewriting the contractual mechanism.

Esso and Electricity Supply Board entered into a 15-year contract for the supply of natural gas. The contract provided for periodic adjustment of the energy charge and, in defined circumstances, a separate price review. A party wishing to initiate that review had to be reasonably satisfied in good faith that the energy charge was no more than 85 per cent of the contractual Comparator.

Esso served a price-review notice based on a notional market price derived from short-term gas prices. ESB contended that the Comparator meant the actual price currently paid under comparable long-term contracts, and that Esso’s notice was invalid. Esso applied under section 32(1) of the Arbitration Act 1996 for a declaration that the arbitral tribunal had jurisdiction.

1. The application was dismissed. The tribunal had no jurisdiction to determine the Comparator because Esso’s Price Review Notice was invalid and no contractual dispute capable of arbitration had arisen.
2. The arbitration machinery could be invoked only after a valid Price Review Notice. A notice that did not substantially comply with the contractual requirements was ineffective, and any tribunal appointed under the machinery necessarily lacked jurisdiction.
3. The phrase “reasonably satisfied” required satisfaction on reasonable grounds. It was not a purely subjective test. The requirement protected the counterparty and was consistent with the limited number and carefully controlled timing of permitted notices.
4. The Comparator was the actual market price for natural gas currently being supplied under comparable contracts between comparable parties and for comparable purposes. It was not a notional price calculated from spot or short-term delivery prices. The court relied on the ordinary meaning of “market price” and the contractual context, including The Arpad [1934] P. 189 at page 202 and Attorney-General of the Republic of Ghana v Texaco Overseas Tankships Ltd (The ‘Texaco Melbourne’) [1994] 1 Lloyd’s Rep. 473.
5. The lack of an active market for comparable long-term gas contracts did not permit the court to substitute a notional comparator. The parties’ intention at the time of contracting, rather than temporary practical difficulty, governed the construction.
6. Esso had proceeded on the mistaken basis that the Comparator was notional. The notice therefore did not show that Esso was reasonably satisfied, on reasonable grounds, that the contractual threshold had been met.