INEOS Manufacturing Scotland Ltd. v Grangemouth Chp Ltd & Anor

Contractual language must be construed in its commercial and factual context, but commercial common sense cannot justify rewriting relatively clear terms. A construction producing a commercially absurd result may be rejected where the surrounding agreement supports an alternative meaning.

On that approach, free emissions allowances issued under the statutory trading scheme were not contractual “CO₂ Emissions Credits”. In any event, they accrued to the party exercising day-to-day operational control and holding the relevant permit, rather than to the plant owner. The owner was therefore under no contractual or implied obligation to procure their transfer.

The claimant supplied electricity and steam to a petrochemical facility under an Electricity Supply Agreement with the first defendant, owner of a combined heat and power plant. The agreement required the first defendant to hold and procure the benefit of specified CO₂ Emissions Credits for the claimant.

Following implementation of the EU emissions trading scheme, allowances for the plant were issued to the second defendant, which operated the plant and held the greenhouse gas emissions permit. The claimant sought the value of existing allowances and arrangements concerning future allowances. The issues were whether the allowances fell within the contractual definition, whether they accrued to the first defendant, whether any obligation arose to procure them for the claimant, and whether contractual limitations applied.

1. Construction. The court applied the contextual approach in ICS v West Bromwich Building Society [1998] 1 W.L.R. 896. Commercial common sense could be used to choose between constructions, but could not justify rewriting clear contractual provisions merely because their allocation of risk appeared one-sided.
2. Definition of emissions credits. Although “entitlement” could, in isolation, encompass an emissions allowance, the claimant’s construction would require the plant owner to surrender the allowances needed for lawful operation and buy substitutes. That was commercially absurd. The structure of the agreement, including its cost and revenue-balancing provisions, and the contemporary distinction between credits and tradable permits or allowances, showed that the parties did not intend clause 3.4 to include allowances issued under the Regulations.
3. Accrual and operation. Alternatively, the allowances did not accrue to the first defendant. The statutory and regulatory concept of an operator depended on control over the installation’s operation. Applying a pragmatic assessment of the operational arrangements, the second defendant controlled day-to-day operations, compliance, emissions monitoring, allowance trading, staffing and emergency shutdowns. It was therefore the legitimate permit holder and recipient of the allowances.
4. Further obligations. The first defendant could not lawfully have applied for the permit as operator. Clauses 3.4 and 20.1 imposed no obligation concerning allowances that did not accrue to it, and no implied term was necessary or obvious. The claim accordingly failed. The court also observed, alternatively, that the claim was not consequential loss and that the contractual exception for wilful breach was not established because the relevant omission was made in good faith.