Apache North Sea Ltd v Euroil Exploration Ltd & Anor

In construing a complex commercial agreement, the court must read the relevant documents together, giving primary weight to their language while considering context, commercial purpose and business common sense. An inconsistency clause operates only where provisions cannot sensibly be read together.

Where a farm-out agreement makes payment conditional on invoices issued under a joint operating agreement, undefined “total costs” are to be assessed under the joint operating agreement’s accounting machinery. Costs for leased equipment are therefore limited by any applicable contractual cap, including prevailing third-party rates. A genuine dispute about an invoice does not postpone interest on the undisputed amount.

Apache North Sea Limited claimed payment from Euroil Exploration Limited under a farm-out agreement for a proportion of the full cost of hiring a drilling rig used for an unsuccessful well. Edison S.p.A. guaranteed Euroil’s obligations.

The parties differed over whether the farm-out agreement entitled Apache to recover its actual rig-hire cost, or whether the associated joint operating agreement limited recovery to the prevailing rate for comparable equipment supplied by non-affiliated third parties. A further issue concerned when contractual interest began to run on the undisputed amount.

1. The claim for the full rig-hire cost was dismissed. The farm-out agreement and the joint operating agreement had to be construed together. The joint operating agreement was deemed by the farm-out agreement to be in force before and after completion.
2. The court applied the ordinary principles of contractual construction. The agreements were complex instruments drafted by specialist lawyers for sophisticated parties, so textual analysis was particularly important. Commercial common sense could not justify departing from clear language or relieving a party from a bad bargain.
3. The phrase “total costs” in the definition of Val D’Isere Earn-In Costs was undefined in the farm-out agreement. Its meaning was supplied by the payment machinery in clauses 3.1 and 3.3.1, which required AFEs, cash calls and invoices to be issued in accordance with the joint operating agreement. The relevant costs were therefore costs properly and necessarily incurred under the Accounting Procedure.
4. Under paragraph 3.2.4 of Schedule 1 to the joint operating agreement, equipment leased or hired by the operator could be charged only at rates commensurate with the cost of ownership and not exceeding rates currently prevailing for like equipment supplied by non-affiliated third parties. There was no conflict engaging clause 19.1 of the farm-out agreement because the two agreements could be read coherently together.
5. Interest was payable on the undisputed amount from the contractual due date. A dispute about the correctness of an invoice did not prevent the undisputed part from becoming payable. The paying party could withhold only the disputed element; otherwise it could avoid interest by raising an unmeritorious dispute.
6. The court would hear the parties on the amount of interest payable in light of its conclusions.