In Scottish Power UK Plc v BP Exploration Operating Company Ltd and others  EWHC 2658 (Comm) the English Commercial Court considered the proper interpretation of contractual exclusion clauses for “loss of use, profit and production” in a natural gas sale and purchase agreement. The case follows a similar decision of the Commercial Court late last year relating to the charter of a drilling unit and provides further guidance as to the approach to be taken to such clauses in the context of a long term supply contract.
In short, Scottish Power entered into a long term agreement for the sale and purchase of natural gas (the “Sale and Purchase Agreement”) from the owners of an oil and gas field known as the “Andrew Field” some 230km north east of Aberdeen in the North Sea (the “Sellers”). The Sellers were found by the court to have breached the Sale and Purchase Agreement by failing to produce gas from the Andrew Field during a period of shut-in largely related to a project to tie-in an adjacent field to existing infrastructure. As an additional claim to its contractual Default Gas claim, Scottish Power claimed to recover general damages for the additional costs it had incurred in sourcing replacement gas from third parties at a higher price than provided for by the Sale and Purchase Agreement. 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).
Among other defences, the Sellers relied upon Article 4.6 of the Sale and Purchase Agreement which provided that:
“…neither Party shall be liable to the other Party for any loss of use, profits, contracts, production or revenue or for business interruption howsoever caused and even where the same is caused by the negligence or breach of duty of the other Party.”
The Sellers argued that Scottish Power’s claim was one for “loss of use” or “loss of production” as it concerned Scottish Power’s inability to use gas produced from the Andrew Field or a lack of production of gas by the Sellers from the Andrew Field. Alternatively, the Sellers argued that Scottish Power’s purchase of replacement gas at a higher price had mitigated the loss of profit and revenue it would have otherwise suffered had it been unable to source replacement gas. Previous case-law (see below) had suggested that a claim for costs incurred in mitigating or avoiding a loss was to be classified in the same way as the loss avoided for the purpose of an exclusion clause. The Sellers argued that Scottish Power’s claim could on this basis also be classified as a claim for loss of profit or revenue.
Although the High Court decided that general damages were not available to Scottish Power, it did go on to reach a decision on the Sellers’ Article 4.6 defence. The court rejected both of the Sellers arguments. In interpreting Article 4.6 the Court drew a distinction between three types of losses:
- The normal or basic measure of loss for a failure to supply goods, being the difference between the contract price and the market price of the goods at the time or times when they ought to have been delivered;
- Secondary losses which go beyond the normal or basic measure of loss, for example if replacement goods are unable to be found with the result that the purchaser’s ability to trade is affected; and
- More remote losses which would not in ordinary circumstances be expected to arise. These losses have in the past been referred to by the courts as “consequential” and “indirect” losses (falling within the second limb of the rule in Hadley v Baxendale  EWHC J70) and require both parties to have specific knowledge as to the risk of such losses at the time of entering into the contract.
The court considered it clear that Article 4.6 did not intend to exclude the normal measure of loss for a failure to supply gas, but was aimed at secondary losses going beyond the usual measure. As the words “consequential” and “indirect” were not used in the clause, there was no need to limit the exclusion to the third category of remoter types of loss mentioned above. Accordingly, the references to “loss of use” and “loss of production” were interpreted by the court as being directed to the future use by Scottish Power of gas to be supplied from the Andrew Field for its own business and the production of other products from it (such as electricity).
The court also applied this distinction to the mitigation case-law relied upon by the Sellers. The court noted that, strictly speaking, the normal measure of loss can always be said to be a mitigation of greater secondary losses (i.e. if a market for replacement gas were not available, then secondary losses would follow). However, only mitigation costs beyond the normal measure of loss were intended to be excluded by Article 4.6.
In reaching its decision, the court followed a similar approach taken late last year to a “loss of use” exclusion by the Commercial Court in Transocean Drilling UK Ltd v Providence Resources Plc (click here for our Law-Now on this earlier decision). The reasoning also reaches the same conclusion as Glencore Energy UK Ltd v Cirrus Oil Services Ltd  EWHC 87 (Comm), where the Commercial Court decided that a clause that excluded recovery of “loss of profits” for the sale of refined crude did not exclude damages for a failure to deliver (click here for our Law-Now on this earlier decision).
Although the decision of the Commercial Court is obiter (as a finding on this point was not strictly necessary), taken together, these cases emphasise that the Commercial Court continues to interpret exclusion clauses narrowly. In the context of oil and gas sale and purchase contracts, “loss of profit” and “loss of use” seem to be being consistently interpreted to mean losses arising under potential downstream arrangements and not a loss of bargain for the contract in question. Underlying this interpretation appears to be a concern to ensure that an alleged wronged party is not left devoid of contractual remedy in the event that its counter-party fails to perform its contractual obligations – unless such arrangement has been clearly and unambiguously agreed.
References: Scottish Power UK Plc v BP Exploration Operating Company Ltd & Ors  EWHC 2658 (Comm)