Senergy Ltd v Zeus Petroleum Ltd

A commercial agreement may be contained in several documents where the evidence shows that the parties intended them collectively to record their bargain. Construction remains objective, assessed against the relevant background and business common sense; subsequent conduct is generally inadmissible as an aid to construction.

A commitment to enter into a further agreement is enforceable where its terms are sufficiently certain and acceptance is subject to an objective requirement that it must not be unreasonably withheld or delayed. That requirement means what it says and is not replaced by a narrower test of arbitrariness or caprice. A refusal based on changed market conditions was unreasonable on the facts.

Senergy claimed damages exceeding US$12 million from Zeus for failing to take up oil-rig drilling commitments under a Letter of Commitment and related communications. Senergy alleged that Zeus was committed to one firm well, with a possible second well, that the relevant rig contract variation included the programme, and that Zeus was obliged to enter into a rig re-supply agreement.

Zeus argued that the contract was confined to the Letter of Commitment, required two wells, was subject to contract, and permitted refusal of the re-supply agreement. The principal issues concerned contractual construction, the effect of the variation, the enforceability and operation of the acceptance provision, and damages.

1. The claim succeeded on liability. The agreement was contained in the Letter of Commitment together with the relevant emails. Alternatively, the same result followed from construing the Letter of Commitment alone.

2. Applying J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078, the parol evidence rule was only a presumption. The court could examine the evidence from start to finish to determine whether the parties’ bargain was wholly contained in one document. The objective approach in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 and ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896 applied. The contract was construed in light of the relevant background and business common sense, subject to the restriction on using subsequent conduct stated in James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583.

3. The commercial effect of the 29 May communication was to narrow the available commitment to one firm slot, with a second slot remaining only a possibility. Alternatively, the words “TBC” in the Letter of Commitment made the second well contingent rather than contractually required.

4. Variation 4 included Zeus’s programme in practice. It was sufficient that the drilling contract covered the required work; no formal identification of Zeus’s programme in the variation was necessary.

5. The obligation to enter into the rig re-supply agreement was binding, not an unenforceable agreement to agree. The principal terms had been agreed and the provision requiring acceptance not to be unreasonably withheld or delayed supplied an objective criterion. Barbudev v Eurocom [2001] EWHC 1560 (Comm) did not assist Zeus because it concerned materially different wording and circumstances.

6. The words “not to be unreasonably withheld or delayed” were to be given their ordinary meaning. They were not synonymous with, or replaced by, a test of arbitrary or capricious conduct. The reasoning in Town Quay Developments Ltd v Eastleigh Borough Council [2008] All ER 37 was context-specific. Changed market conditions and the alleged timing difficulty did not make Zeus’s refusal reasonable.

7. Zeus was in breach by failing to enter into the re-supply agreement. Senergy was entitled to recover US$212,625 under the 1.75% fee provision, subject to further submissions. The remaining damages issues, including the warm-stacking and third-party service claims, required further argument or evidence and were left for determination.