In BG Global Energy Ltd and Others v Talisman Sinopec Energy UK Ltd and Others, the High Court considered a number of preliminary issues concerning the interpretation of a services agreement entered into by the owners of two adjoining North Sea oilfields.  One of these preliminary issues considered the Claimants' argument that the granting of prior written approval was a condition precedent to the Defendants varying their services under the contract and that a variation without such approval was ineffective.  The Judge held that the variation was permitted under the contract and whilst a failure to seek written approval would be a breach that could give rise to a claim, it did not follow that the Defendants' subsequent variation was ineffective.

Background

On 22 June 2001, the owners of Blake Field and Ross Field entered into a transportation, processing and operating services agreement (the "TPOSA").  Pursuant to the TPOSA, the Defendants, on behalf of the Ross Field owners, agreed to provide services to the owners of Blake Field, such services to be paid for by the Claimants by way each of them contributing to Operating Expenditure (the "Operating Expenditure").  Initially, services under the TPOSA were provided utilising a floating production, storage and offloading vessel ("FPSO") that was operated by a third party under a separate agreement (the "FPSO Agreement").  This third party ensured that the FPSO was suitably equipped (including appropriate insurance, crew and fuel etc.). 

Clause 6.4 of the TPOSA stipulated that the Defendants were barred from amending any payment obligations in the FPSO Agreement which might result in increased Operating Expenditure unless the Defendants sought "prior written approval of [the Claimants], such approval not to be unreasonably delayed and/or withheld". 

In 2005, the Defendants replaced the FPSO Agreement with a bareboat charter (the "Charter").  Under the Charter, the Defendants were now responsible for maintaining and equipping the FPSO.  The Defendants, therefore, charged the Claimants for these extra costs, resulting in an increase in Operating Expenditure.  

The Claimants argued that the requirement for prior written approval under Clause 6.4 was a condition precedent to amending the FPSO Agreement and thus the Defendants' failure to seek such approval before implementing the Charter invalidated the subsequent increased payment obligations.  The Defendants argued that they had given the Claimants the opportunity to consent to the Charter.

Decision

As these issues were preliminary issues heard before trial, the Judge, Cooke J, was not deciding on issues of fact but only on issues of contractual interpretation.  On the issue of prior written approval, the Court held that the requirement in Clause 6.4 was a promissory undertaking rather than a condition precedent.

The Claimants sought to rely on a number of authorities (includingLinden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85) that have provided guidance on the construction of conditions precedent in relation to the assignment of leases and other contractual rights.  In such authorities, similar language to this case was used to render the assignments, without prior consent, as ineffective. 

Cooke J, however, sought to distinguish the Linden chain of authorities from the case before him by holding that "the prohibition against assignment [of contractual rights and leases] can only properly be given effect by rendering it ineffective if consent is withheld" whereas "other prohibitions in contracts should however be read on their own terms".

As such, Cooke J distinguished a clause such as Clause 6.4 in the TPOSA from those that involve a prohibition on assignment.  He held that Clause 6.4 contains the "language of warranty in respect of the past and promise in respect of the future", where breach gives rise to a number of potential remedies as opposed to prohibition of assignment clauses where the "only effective remedy is to make the assignment ineffective". 

He held that if this claim were to proceed to trial, and the Defendants were found to have failed to seek such approval, they would still be entitled to increases in Operating Expenditure that would be due to them from the Claimants.  He concluded that the Claimants would then have a claim for damages for breach of Clause 6.4 and the remedy of equitable set-off (for any losses flowing directly from the Defendants' alleged failure to seek consent) against the Defendants' claims. However, if the Defendants were able to show at trial that it would have been unreasonable for the Claimants to withhold their consent, the Claimants would have suffered no loss and they would, therefore, only be entitled to nominal damages.

Comment

The case highlights the Court's approach to the construction of conditions precedent and the importance of clear drafting of such provisions.  Distinguishing the provisions in Clause 6.4 from those prohibiting the assignment of contractual rights, Cooke J's primary reason for finding that the prior written approval required in Clause 6.4 was a "promissory obligation", rather than a condition precedent, was in the contractual language used.  Whilst the clause created an obligation on the Defendants to seek prior written approval, there was no wording that rendered any subsequent action without such approval as ineffective. Cooke J referred to this as the "language of ineffectiveness".