The Commercial Court has recently considered whether a contractual notification requirement is a condition precedent or an intermediate term, in relation to a force majeure claim in a natural gas sale and purchase agreement. In contemplating the issue of whether a notification provision is an intermediate term the Commercial Court addressed an issue rarely considered: whether even if notification is not a condition precedent to claiming force majeure, a material breach of the notification provision may, in any event, prevent force majeure from being claimed. 

Facts

The facts of the dispute are set out in a Law-Now on a separate aspect of the decision (please click here to be redirected to it) (Scottish Power UK Plc v BP Exploration Operating Company Ltd and others [2015] EWHC 2658 (Comm)). In summary, Scottish Power entered into four long-term agreements (on materially identical terms) for the sale and purchase of natural gas ("Agreements"). It agreed to purchase from the sellers (BP Exploration Operating Company Limited, Talisman Sinopec North Sea Limited, ENI TNS Limited and JX Nippon Exploration and Production (UK) Limited ("the Andrew owners" or "Sellers")) natural gas produced from the Andrew Field. 

One of the questions before the court was whether the Andrew owners were precluded from relying on a force majeure provision as a defence to liability for the first 11 days of the shutdown by their alleged failure to comply with one of the multiple notification steps in the provision. 

The Force Majeure clause (Article 15.2) in the Agreements stated: 

"The Parties shall, except where otherwise specified in this Agreement, be relieved from liability under this Agreement:

(1) In the case of the Seller, to the extent that owing to Force Majeure it has not delivered the quantities of Natural Gas which it should have delivered under this Agreement or has not performed any one or more of its obligations under this Agreement ..."

Article 15.4 of the Agreements imposed a number of requirements on a party claiming relief under Article 15.2 on the ground of Force Majeure:

"A Party, when claiming relief under Clause 15.2 shall: - 

(1) within ten (10) Days of the failure or inability to fulfil in [sic] obligation hereunder for which relief is sought, notify the other Party thereof and shall within five (5) Working Days of such notification provide an interim report which shall furnish such relevant information as is available appertaining to the event including the place thereof, the reasons for the failure and the reasons why obligations under this Agreement were affected, and give an estimate of the period of time required to remedy the failure;

(2) within twenty (20) Working Days of such notification, if requested, provide a detailed report which shall amplify the information contained in the interim report and contain such further explanation and information relevant to the event causing the failure as may be reasonable [sic] required;

(3) upon request, as soon as is reasonably practicable, give or procure access at the risk of the Party seeking access, for a reasonable number of representatives of the other Party to examine the scene of the vent causing the failure and/or the installation, machinery or equipment which has failed, provided that the reasonable costs of transportation to the scene shall be at the expense of the Party seeking access, if such event is agreed or adjudged to give rise to relief from liability under Clause 15.2, and shall otherwise be at the expense of the Party seeking relief;

(4) subject in the case where the Seller or the Buyer is seeking relief under Clause 15.2(1) or Clause 15.2(2) (as the case may be) to the provisions of Article 7, take as soon as reasonably practicable all reasonable steps to rectify the cause of the failure and to recommence performance of its obligations under this Agreement ...;

(5) keep the other Party informed, on an ongoing basis, of the actions being taken under Clause 15.4(4)."

The Andrew owners maintained that they complied with Article 15.4(1) by notifying Scottish Power of their claim of Force Majeure by a letter dated 16 May 2011 and by providing an interim report to Scottish Power on 20 May 2011. They admitted, however, that they did not provide a further detailed report pursuant to Article 15.4(2) which Scottish Power contended was a condition precedent (or subsequent) to a successful claim for relief under Article 15.2.

In the alternative, Scottish Power argued Article 15.4(2) was an intermediate term. It argued that even if Article 15.4(2) was not a condition precedent such that any failure to comply with its terms precluded Force Majeure relief, a sufficiently serious failure would do so.

Decision

Is Article 15.4(2) a condition precedent? 

The court considered the (differing) authorities relating to notice provisions in force majeure clauses but concluded they were of limited assistance to interpreting the clause in question. It found that "consideration of how courts have construed differently worded clauses in different contracts is necessarily of limited assistance." Instead, the focus was on the precise terms of the Agreements with which the present case was concerned and to ascertain their meaning applying the ordinary principles of contract interpretation. 

It was held that Article 15.4(2) was not a condition precedent (or a condition subsequent) and non-compliance with it did not result in their force majeure claim failing. The basis for the decision was as follows:

  1. There were no words in the contract to stipulate that non-compliance would preclude a claim for relief on force majeure grounds. The contract did not say, as it easily could have, that a party must do the things stipulated in Article 15.4 in order to claim relief under Article 15.2. The absence of such language was considered to be all the more significant in light of the fact the Agreements were detailed, elaborate and clearly drafted by professionals. 
  2. The use of the word "shall" in Article 15.4 signifies that the requirements of the clause are mandatory as they are contractual obligations. It does not say or imply anything about what the consequence is intended to be of failing to perform those obligations. The court noted that if, for example, the clause had used the word "may" rather than "shall", it would be impossible to argue that compliance was a condition precedent to a claim for force majeure relief but the inverse does not follow.
  3. The time within which Article 15.4(2) requires a detailed report to be provided does not commence until notification of a force majeure event has been given. By this time, the period of non-performance may already have ended.
  4. The court did not consider this to be a case where it was so clear that reasonable people entering into the contract would have intended Article 15.4(2) to be a condition precedent even though it was not expressly stated.  The court stated that "it seems far from obvious that reasonable people in the position of the parties would have thought it appropriate to make compliance with this requirement a condition of the right to claim relief for Force Majeure. Certainly, it is not so obvious that they would have thought it unnecessary to say so expressly."
  5. There is considerable room for uncertainty about whether clause 15.4(2) has been complied with. This conclusion was reinforced when the court widened the focus to look at other provisions of Article 15.4. The court said that it would be a strong thing to agree that, for example, failure to keep the other party informed, at any stage, of actions being taken to rectify the cause of a party’s failure to perform its obligations under the Agreement should have the result that the party automatically loses its right to claim relief. It was also added that there was nothing in the language of Article 15.4 which provides any basis for treating any of its sub-clauses differently such that some of the requirements were conditions precedent to a successful claim for relief yet others were not.
  6. In the court’s view, it cannot be said that Article 15.4 gives no worthwhile protection if the only sanction for non-compliance is the remedy of damages.
  7. It was not considered that making compliance a condition precedent is inherently more sensible or commercially reasonable than not doing so.

Is Article 15.4(2) an intermediate term?

In Bremer Handelsgesellschaft mbH v Vanden Avenne [1978] 2 Lloyd's Rep 109 Lord Wilberforce identified three factors relevant to whether the clause in question was a condition precedent, the third of which was "general considerations of law". In discussing that factor, Lord Wilberforce said:

"Automatic and invariable treatment of a clause such as this runs counter to the approach, which modern authorities recognise, of treating such a provision as having the force of a condition (giving rise to rescission or invalidity) or a contractual term (giving rise to damages only) according to the nature and gravity of the breach. The clause is then categorised as an innominate term."

Counsel for Scottish Power drew the Commercial Court’s attention to various authorities and referred to the Bremer case as authority for the proposition that a clause requiring notice to be given of an event relied on as constituting force majeure may be an intermediate term: see e.g. Chitty on Contract Law (31st Edn, 2012) at para 12-039.

Interestingly, the Commercial Court accepted that a clause which requires a party wishing to claim relief from liability on the ground of force majeure to follow a certain procedure (such as giving notice to the other party) is capable in principle of constituting an "intermediate term" in the sense that, although a breach of the clause will not automatically deprive the party of the right to claim the relevant protection, a sufficiently serious breach will have that consequence.

Importantly, in reaching this decision, the Commercial Court noted that if, however, the label "intermediate term" is used to describe such a clause, it is important to recognise that this designation is not being used in the same sense as when classifying contract terms for the purpose of deciding whether a breach of a particular term gives the innocent party a right to terminate the contract.

However, while the court accepted that a clause which requires a party wishing to claim a particular contractual benefit or protection to follow a certain procedure (for example, giving notice to the other party) is capable in principle of constituting an "intermediate term", in this case it held that Article 15.4(2) was not.  

The Commercial Court decided that classification of a term as an innominate term is, unless the parties have agreed its status, a matter of law for the court and not a question of interpretation of the contract. The Commercial Court went on to say that there is no rule of law whereby the consequence of a breach of a procedural requirement specified in the contract is the loss of the right to claim relief on the ground of force majeure. The only basis on which a sufficiently serious failure to comply with Article 15.4(2) could be treated as precluding a claim for force majeure relief, even though a less serious failure would not, is if this is what the parties have agreed on the proper construction of the contract. For similar reasons to those discussed in relation to Article 15.4(2) being a condition precedent, the Commercial Court held that there was no reason to infer that there were any circumstances in which the parties must be taken to have intended the language of Article 15.4(2) to mean that the failure to provide a further, detailed report, would prevent a party from claiming force majeure relief.

Comment

Disagreements relating to whether notification provisions amount to a condition precedent to claiming force majeure are a well-trodden ground for oil and gas lawyers. However, debates concerning whether a notification provision might amount to an "intermediate term" are less common.  

Whilst the decision of the Commercial Court might create an additional level of uncertainty concerning the conditionality of claiming force majeure, it largely reinforces the approach that if it is intended that giving a specified notice should be a pre-requisite to being able to claim for force majeure, this should be clearly articulated in the contract; otherwise, it is unlikely that the non-performing party will be precluded from relying on a force majeure defence. In addition, if notice provisions are intended to create conditionality, the notice provisions and how to fulfil them should be clearly set out so that parties are in no doubt as to whether the requirements have been fulfilled. 

Although the decision does create the potential for a notice provision being an intermediate term, the test of whether it does so is one of law rather than contractual construction. As the decision of the Commercial Court illustrates, there may be limited circumstances in which English law would decide a notification provision is an "intermediate term".  

Scottish Power UK Plc v BP Exploration Operating Company Ltd and others [2015] EWHC 2658 (Comm)