BP Exploration Operating Company Ltd v Dolphin Drilling Ltd

Contractual termination rights are construed by asking what a reasonable person, with the relevant background knowledge, would understand the parties to have meant. Clear wording should not be displaced merely because its operation is commercially harsh or favours one party. A departure from ordinary meaning requires both a clear linguistic mistake and a clear understanding of the correction required. Where a contract is based on an established industry standard, its commercial context may strongly support giving the words their apparent meaning. Defined terms and termination provisions must be read with the agreement as a whole.

BP sought declarations concerning its right to terminate a three-year drilling-rig charter with Dolphin at any time for its own convenience. The contract incorporated the LOGIC General Conditions and provided for termination under section II, clause 22.1(a), together with a termination fee under clause 22.2 and section III, clause 2.8.

BP contended that termination was available before the contractual Commencement Date and that the loss-of-remuneration payment applied only to termination after that date. Dolphin argued that such a construction was commercially absurd because BP could terminate before drilling commenced without paying the three-year loss-of-profit element. The central issue was whether the convenience termination right was implicitly limited to the period after the Commencement Date.

1. Declarations granted. BP was entitled to terminate the agreement at any time, including before the Commencement Date, for its convenience under section II, clause 22.1(a).
2. The applicable approach was that stated in Chartbrook v Persimmon Homes Ltd [2009] 3 WLR 267. The court asked what a reasonable person with the relevant background knowledge would understand the contractual language to mean. A departure from ordinary meaning required a clear linguistic mistake and clarity as to the meaning intended.
3. The relevant termination provision was substantially derived from the established LOGIC industry standard. Its use over many years, and the fact that termination for several other reasons could plainly occur before drilling commenced, undermined the suggested implied limitation. The contract used the same introductory wording for all termination grounds and did not confine clause 22.1(a) by reference to the Commencement Date.
4. The agreement had to be read as a whole. The terms applied from the Effective Date, whereas the Commencement Date identified when the rig was ready and under tow to the first well. “Contract” could not sensibly have two different meanings within the same termination provision. “Work” included contractual activities required before commencement, including modifications, upgrades, documentation and inspection.
5. The absence of a loss-of-remuneration payment for pre-Commencement termination did not make the construction irrational. Clause 22.2 could require payment for work and other specified expenditure incurred before commencement. The adverse financial consequences arose from an established contractual option and were severe in the circumstances, but were not commercially absurd.