Vitol E & P Ltd v Africa Oil and Gas Corporation

In construing “commencement of drilling” in a commercial agreement, the court should begin with the natural and ordinary meaning of the words in their contractual, factual and commercial context. Preparatory operations, including mobilisation of a drilling rig, do not amount to commencement where the language refers to drilling itself. In the oil-drilling context, drilling commenced when the drill bit physically penetrated the seabed, known as spudding. Commercial common sense cannot displace clear language merely because the result is disadvantageous or appears unfair. A construction which provides a clear and certain date for a substantial payment obligation is to be preferred where the contract contains no indication that a broader, liability-based or fact-sensitive test was intended.

Vitol sold its interest in an offshore oil exploration project to Africa Oil and Gas Corporation under an agreement providing for deferred consideration of $7.4 million if either the Lideka East Well was removed from the approved work programme or drilling was not commenced before the expiry of the second exploration period.

The rig was mobilised before 30 June 2013, but the well was not spudded until 20 July 2013. The central issue was whether “commencement of drilling” meant mobilisation of the rig, or the initial penetration of the seabed.

1. The court applied the contractual construction principles stated in Arnold v Britton [2015] AC 1619. The court must identify what a reasonable person with the relevant background knowledge would understand the language to mean, considering the natural and ordinary meaning, other contractual provisions, the clause’s purpose, known circumstances and commercial common sense. The language remains central.

2. Commercial common sense is not to be applied retrospectively. The court must not reject natural language merely because the bargain proved imprudent or disadvantageous, or rewrite the agreement to assist an unwise party.

3. The natural meaning of “commencement of drilling” was the physical penetration of the seabed, or spudding. Drilling is a process which can sensibly be said to start and stop. Mobilisation and other preparatory activities were not commencement of drilling. The court preferred that approach consistently with Excalibur v Texas Keystone [2013] EWHC 2767 and Amoco v British American Offshore Limited (16 November 2001).

4. The reference to drilling in clause 7.1(A) did not control the meaning in clause 7.1(B). Clause 7.1(A) addressed removal of the entire drilling project from the work programme, whereas clause 7.1(B) addressed the commencement of drilling. The budget’s inclusion of preparatory costs did not alter that conclusion.

5. The commercial purpose of the clause did not require a wider or liability-based test. Spudding supplied the necessary clarity and certainty. The clause was not genuinely ambiguous and the contra proferentem rule did not apply.

6. Because spudding occurred after 30 June 2013, clause 7.1(B) was satisfied and AOGC was required to pay the deferred consideration. Consequential matters were reserved for a later hearing.