A L Challis Ltd v British Gas Trading Ltd

Where a contract fixes payment by reference to stated carbon savings per product, that clear formula prevails over a general purpose of sharing later regulatory credits. A payment described as being based on carbon savings is not necessarily payment for every credit later obtained. Recitals and defined terms concerning a regulatory scheme inform construction but cannot displace clear operative provisions. Rival constructions must be assessed iteratively against the contract and their commercial consequences. An interpretation making invoicing and aggregate payment caps unworkable until a later regulatory decision strongly supports rejection of that interpretation.

Challis supplied water-saving widgets to British Gas under agreements made against the CERT scheme. The agreements specified payment per tonne of carbon savings and stated that each product equated to 1.018 tonnes. British Gas later obtained a market transformation uplift for only part of the widget-related savings. Challis claimed additional payment for that uplift; British Gas maintained that the agreed formula was fixed. Popplewell J decided in favour of British Gas at [2016] EWHC 513 (Comm). The appeal concerned whether the agreements required payment for regulatory credits arising from the uplift as well as for the stated carbon savings.

1. Disposition. The appeal was dismissed unanimously. Longmore LJ gave the leading judgment, with Lewison LJ and Asplin LJ agreeing. Challis was not entitled to any further payment beyond the sums already paid against its invoices.
2. Contractual payment obligation. Clauses 6.1 and 6.2, read with Schedule 4, required British Gas to pay a fixed amount calculated by reference to the specified carbon savings. Schedule 4 provided prices of £6.70 or £8.70 per tonne and stated that each product equated to 1.018 tonnes of carbon savings. At the time of invoicing, those were the savings known to the parties. The wording did not provide for a later additional payment when British Gas obtained a market transformation uplift.
3. Construction of the wider agreement. The recitals and references to CERT, the Scheme and Credits showed the regulatory background. They did not override the clear payment provisions. The expression “based on the carbon savings” was not equivalent to payment for carbon credits. The 50% market transformation uplift was a notional regulatory increase, not itself a carbon saving, and the contract contained no clear words extending payment to it.
4. Iterative construction and commercial certainty. The court applied the iterative process described in Re Sigma Finance Corp [2009] BCC 393, in the Supreme Court [2010] 1 AER 571, and Wood v Capita Insurance Service [2017] 2 WLR 1095. The competing constructions were tested against the cap, extension-notice provisions and invoicing arrangements. Challis’s construction would make it impossible to know when the aggregate cap had been exceeded or what additional amount could be invoiced until a later Ofgem decision. That was inimical to the commercial certainty expected from the agreements.
5. Orders. The appeal was dismissed. Challis was ordered to pay British Gas’s appeal costs, including £30,000 on account within 14 days.

1. Court of Appeal (Civil Division): dismissed Challis’s appeal and ordered it to pay British Gas’s appeal costs.
2. High Court, Queen’s Bench Division, Commercial Court: Popplewell J decided in favour of British Gas on the contractual construction issue in [2016] EWHC 513 (Comm).