Teesside Gas Transportation Ltd v CATS North Sea Ltd & Ors

In construing a long-term commercial agreement, the court must undertake a unitary and iterative exercise. It must balance the language, contractual context, commercial purpose and relevant background, while recognising that detailed drafting may not address every future circumstance. A long-term contract may require a flexible construction, but implication of a general duty of good faith remains dependent on the language and context of the contract. Where the agreement expressly identifies particular good faith obligations, those provisions may define the scope of the obligation exhaustively.

Contractual cost allocation may be based on an implied requirement that the methodology be fair, equitable and reasonable. Contractual notification mechanisms do not necessarily create conditions precedent or conclusively determine substantive payment rights.

The claimant had reserved capacity in the defendants’ North Sea gas transportation system under a 1990 Capacity Reservation and Transportation Agreement, later amended in 1998. From 2013, the contractual tariff was replaced by a Capacity Fee calculated by reference to the claimant’s reserved capacity, total CATS capacity and specified operating and capital expenditure.

The claimant withheld approximately £37.7 million and sought declarations concerning the calculation of the fee. The defendants counterclaimed for the unpaid sums and interest. The issues concerned the scope of the transportation facilities, cost allocation, categorisation of expenditure, the meaning of CATS Capacity, the defendants’ ability to restate earlier fees and the claimant’s good faith in disputing invoices.

The court resolved the contractual issues principally in favour of the defendants, subject to limited findings concerning cost categorisation and bad-faith withholding.

1. Construction. The CRTA was a complex, long-term commercial agreement. Its terms were construed through a unitary and iterative process, balancing text, context and commercial purpose. Although a flexible approach may be appropriate for a long-term contract, the CRTA’s express good-faith provisions exhaustively defined the parties’ good-faith obligations. No wider implied duty arose.
2. Scope and allocation. Facilities upstream of the relevant Entry Point were outside the CATS Transportation Facilities. Mercury-removal facilities formed part of those facilities because they were used to achieve safe redelivery. Shared costs could be allocated under an implied term requiring a fair, equitable and reasonable methodology. The defendants’ onshore tag-factor methodology satisfied that standard.
3. Capital expenditure. Expenditure was of a capital nature only where it enhanced the economic benefits of the relevant asset. The CRTA did not incorporate every detail of any accounting standard and contained no materiality threshold. The parties were directed to agree the classification of individual items, failing which further submissions would be required.
4. CATS Capacity. The denominator in the Capacity Fee formula was based on up-to-date contracted capacity, not historic maximum delivery rates. The TAA update schedules constituted effective notices updating the relevant information. A request from the claimant was not a condition precedent to such updating.
5. Restatement and interest. The contractual deadlines for notifying the adjusted Capacity Fee were prescriptive but not final or immutable. They did not extinguish the defendants’ substantive entitlement to the correct fee. The claimant’s good-faith obligation was subjective and concerned only the reasons for disputing invoices. Enhanced interest was recoverable only for identified sums withheld without good faith and from the relevant date.

Quantum and the precise form of order were left for agreement or further submissions.