British Gas Trading Ltd v Amerada Hess Ltd & Anor

A contractual notice provision must be construed in its commercial and procedural context. Where a notice initiates an expert determination procedure, it need not necessarily set out the full substance of the reasoning supporting the notifying party’s belief. The question is whether it identifies the relevant contractual ground and gives reasons which inform that belief sufficiently to trigger the agreed process. A requirement to provide the substance of the reasoning may instead apply to the expert’s draft or final determination, particularly where the parties have an opportunity to make representations. The court should avoid a construction which creates uncertain and potentially extensive disputes about the adequacy of the notice before the substantive determination can occur.

The claimant bought gas from the defendants under four materially similar depletion contracts concerning the Leman and Indefatigable fields. The contracts allowed the sellers to terminate when continued production ceased to be Economic, provided that the sellers gave at least eighteen months’ notice specifying the relevant year and giving reasons for their belief.

The sellers served notices stating that natural decline in reservoir pressure meant that production during the relevant year would no longer be Economic because Production Costs would exceed Gross Revenue. The claimant contended that valid notices had to state the substance of the sellers’ reasoning, including the forecast figures, assumptions and cost analysis. The central issue was whether the notices complied with Article XIX.3(b).

1. The declaration was refused. The notices served on 29 March 2005 complied with Article XIX.3(b), and the claimant was not entitled to a declaration that they were invalid.
2. Notice provisions must be construed in their contractual and commercial context. The authorities, including LHS Holdings Ltd v Laporte plc and [2001] 2 All ER (Comm) 563, Tradax Export SA v Italcarbo Societa di Navigazione Spa (the Sandalion) and [1983] 1 Lloyd’s Rep 514, and Babanaft International Co. S.A. v Avant Petroleum Inc (the Oltenia) and [1982] 1 WLR 871, illustrated that the required content depends on the purpose served by the notice.
3. Article XIX.3 was closer to a notice initiating a dispute resolution procedure than to a notice identifying the precise case which the recipient had to meet. The buyer had an unfettered right to object and seek expert determination. That structure indicated that the parties did not intend preliminary litigation over whether the seller had sufficiently substantiated its case.
4. The phrase requiring the seller to give reasons did not require the notice to contain the full substance of the reasoning process, such as detailed forecasts of Gross Revenue and Production Costs. The notices identified the relevant year, the asserted natural decline in reservoir pressure and the contractual economic conclusion that Production Costs would exceed Gross Revenue.
5. The expert determination provisions reinforced that conclusion. Unlike the initiating notice, a draft or final expert determination had to give reasons sufficient to permit representations by the parties. The different functions of the two documents justified different standards of detail.
6. The additional provision in the Indefatigable agreements concerning proposed contractual modifications did not require a different construction. It reinforced, rather than displaced, the common construction applicable to all four agreements.