Teesside Gas Transportation Ltd v Cats North Sea Ltd & Ors

Commercial contracts must be construed as a whole. The court considers the language, related provisions, payment structure, known background and commercial common sense. A capacity figure used to apportion operating costs referred to current firm capacity reserved by third-party shippers, represented by their Daily Reserved Capacity Rates, rather than historical maximum delivery rates. The figure could be updated under the contractual notice mechanism. Operational and planning provisions, allocation arrangements and provisions concerning emergency reductions, substitution and abandonment supported that construction. Updated schedules could constitute valid notices where a reasonable observer would understand them as amendments to the earlier information.

Teesside Gas Transportation Limited appealed from Butcher J’s judgment in the Commercial Court, reported at [2019] EWHC 1220 (Comm). The dispute concerned the amount payable under a long-term pipeline transportation agreement for the right to use pipeline capacity.

The agreement’s Capacity Fee formula used the defined term CATS Capacity. The central issue was whether the relevant rate for third-party shippers was the highest delivery rate expected during the whole period of each transportation contract, or the current firm capacity reserved by each shipper. A further issue concerned whether later schedules validly updated the notified information.

Males LJ gave the leading judgment. Newey LJ and the Chancellor agreed.

1. Appeal dismissed. The Capacity Fee was to be calculated using the CATS Parties’ construction of CATS Capacity.
2. The court applied the unitary approach to contractual construction described as settled in Arnold v Britton [2015] UKSC 36, [2015] AC 1619, and Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173. It considered the language of clause 4.6, other relevant provisions, the payment structure, background circumstances known when the agreement was made, and commercial common sense.
3. Although clause 4.6(a)(vii), read in isolation, supported TGTL’s argument that the relevant period was the whole period of each transportation contract, the agreement as a whole pointed the other way. The notified rate meant the current capacity actually reserved or booked by each third-party shipper, reflected in its Daily Reserved Capacity Rate. It was not an historical maximum fixed for the life of the contract.
4. That construction was supported by the allocation provisions and by clauses dealing with emergency reductions, substitution and abandonment. Those provisions required an up-to-date capacity figure so that allocation and cost sharing remained commercially coherent and fair. The operational and planning purpose of the information also favoured current figures.
5. The judge’s finding that seven TAA Update Schedules constituted valid updates under clause 4.6(b) was unchallenged. The Capacity Fee was therefore to be calculated by reference to the figures in those schedules. The appellant was ordered to pay the respondents’ appeal costs, including £400,000 on account.

• Court of Appeal (Civil Division): [2020] EWCA Civ 503. Appeal dismissed. The appellant was ordered to pay the respondents’ costs.
• High Court, Commercial Court: Butcher J, [2019] EWHC 1220 (Comm). The judge construed the Capacity Fee provisions in favour of the current firm booked-capacity figures.