British Gas Trading Ltd v Shell UK Ltd & Anor

A contractual obligation to maintain capacity to deliver gas from specified reservoirs requires physical production capacity from those reservoirs. Gas owed by other producers in repayment of gas previously lent cannot be counted towards that capacity, even though it may be used to meet delivery obligations through contractual commingling arrangements.

Contract damages are assessed by assuming performance of the obligation actually breached. They are not assessed by assuming that the party would have exercised an unexercised contractual option to alter that obligation and avoid the breach. Where proper performance would have left the buyer obliged to take and pay for the same quantity, the breach causes no recoverable loss beyond nominal damages.

Shell and Esso agreed under long-term gas sale agreements to sell British Gas gas from the Sole Pit Reservoirs. The agreements required the sellers to maintain Delivery Capacity of 130% of the applicable contractual daily quantity. Gas from several reservoirs was commingled at Bacton under STACA. The sellers had lent Sole Pit gas to other user groups and were owed substantial repayment gas.

The Commercial Court, in [2019] EWHC 1735 (Comm), held that repayment gas could be counted towards Delivery Capacity and dismissed British Gas’s claim. It nevertheless rejected the sellers’ argument that British Gas’s proposed damages claim was legally unsustainable. British Gas appealed on construction and the sellers cross-appealed on damages.

The central issues were whether repayment gas was gas from the Reservoirs for the capacity obligation, and whether damages could assume that the sellers would have served notices reducing the contractual quantity.

1. Appeal and cross-appeal allowed. Males LJ gave the principal judgment. Andrews LJ and Peter Jackson LJ agreed. The sellers’ obligation under clause 6.4(1) was to maintain the physical capacity to deliver gas from the Sole Pit Reservoirs at 130% of the prevailing TRDQ.

2. The words from the Reservoirs, the defined use of Delivery Capacity elsewhere in the agreements, and the detailed machinery for varying the TRDQ all pointed to physical reservoir capacity. That machinery required technical information about reservoir deliverability and field facilities. It made no provision for repayment gas from other reservoirs. STACA contemplated that lending and repayment would ordinarily be temporary. Its arrangements therefore did not alter the capacity obligation. Gas owed in repayment could be used to meet delivery nominations, but could not be counted in deciding whether the sellers maintained Delivery Capacity.

3. On damages, the governing compensatory principle required the court to assume performance of the obligation breached: see Robinson v Harman (1848) 1 Ex Rep 850. The obligation was to maintain capacity at 130% of the TRDQ actually in force. The sellers had a right, but no duty, to serve a Variation Notice reducing that quantity. An unexercised power to vary the future obligation was not a discretion as to how to perform the existing obligation.

4. The counterfactual analysis in Durham Tees Valley Airport Ltd v Bmibaby Ltd [2010] EWCA Civ 485 did not permit damages to be assessed on the basis that the sellers would have reduced the TRDQ. Had they performed their actual capacity obligation, British Gas would have received and paid for the same contractual quantity. It therefore suffered no recoverable loss. British Gas was entitled at most to nominal damages.

• Court of Appeal (Civil Division): British Gas’s appeal on construction and the sellers’ cross-appeal on damages were both allowed. The capacity obligation was construed in British Gas’s favour, but the damages claim failed save for nominal damages: [2020] EWCA Civ 2349.
• High Court, Commercial Court: The judge held that repayment gas under STACA could be counted towards Delivery Capacity and dismissed British Gas’s claim. He rejected the sellers’ contention that British Gas’s damages case was bad in law: [2019] EWHC 1735 (Comm).