Scottish Power UK Plc v BP Exploration Operating Company Ltd & Ors

A contractual standard requiring performance in accordance with a reasonable and prudent operator standard may govern both whether and how contractual activities are performed. A deliberate shutdown undertaken for purposes unrelated to performing the contract may therefore breach the standard.

A contractual default-gas regime providing compensation for underdeliveries excludes damages for loss caused by quantities actually nominated and compensated by Default Gas, but does not exclude damages for non-deliveries which were never underdeliveries. An exclusion of loss of use, profits, production, revenue and business interruption does not ordinarily exclude the normal market-price measure of loss for non-delivery. Procedural reporting obligations in a force majeure clause do not bar relief unless the contract clearly makes them conditions precedent or subsequent.

Scottish Power was the buyer under four long-term gas sale agreements with the owners of the Andrew Field. Production was shut down for over three years while the owners carried out works connected with the development of the Kinnoull Field, the Lower Cretaceous reservoir and maintenance of the Andrew platform.

The parties agreed five preliminary issues concerning the construction and application of the agreements. They concerned the meaning of the Article 7.1 reasonable and prudent operator standard, whether the shutdown breached that provision, whether Article 16 made Default Gas the exclusive remedy, whether Article 4.6 excluded Scottish Power’s damages claim, and whether failure to provide a detailed force majeure report under Article 15.4(2) barred reliance on Article 15.2.

1. Article 7.1. The clause imposed one qualified obligation, not separate absolute obligations to provide, install, repair, maintain and operate the facilities. The reasonable and prudent operator standard governed both when those activities had to be undertaken and how they had to be performed. Non-operation was therefore a breach only if inconsistent with that standard.
2. Application of the standard. The definition required the operator to seek in good faith to perform its contractual obligations and, in doing so and in its general business, to exercise the skill, diligence, prudence and foresight reasonably expected of a skilled and experienced operator. The Andrew owners deliberately shut down production for predominantly commercial reasons connected with the AAD works and were not seeking to perform their obligations to deliver gas during the shutdown. They therefore failed to comply with the standard and breached Article 7.1. Economic factors were not excluded from the objective assessment.
3. Article 16. Article 16.6 made Default Gas the exclusive remedy for loss caused by quantities of gas actually nominated and underdelivered, because those quantities automatically attracted the contractual compensation. It did not make Default Gas the remedy for every breach of Article 7.1. Damages remained available for non-deliveries which would have been nominated if the contract had been performed but were not actually nominated, subject to credit for any Default Gas deliberately forgone.
4. Article 4.6. The exclusion concerned secondary losses, such as loss of use of gas in the buyer’s business, lost profits, lost production and business interruption. It did not exclude the normal market-price measure of loss caused by non-delivery, namely the additional cost of obtaining replacement gas.
5. Article 15.4(2). The detailed-report requirement was mandatory, but the agreement did not make compliance a condition precedent or subsequent to force majeure relief. Its breach could support damages and might have evidential significance, but it did not automatically defeat the force majeure claim. The five preliminary issues were answered accordingly.