Contracting and Contract Management: All change... or business as usual? Simon Rainey Q.C.

Transcription

1 Contracting and Contract Management: All change... or business as usual? Simon Rainey Q.C.

2 A. The Commercial Meaning and Commercial Common Sense in Construing Contracts

3 A. The Commercial Meaning and Commercial Common Sense in Construing Contracts

4 The Commercial Meaning and Commercial Common Sense in Construing Contracts Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101 Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 TEST: where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense REJECTED APPROACH: Unless the most natural meaning of the words produces a result which is so extreme as to suggest that it was unintended, the court has no alternative but to give effect it its terms. Arnold v Britton [2015] UKSC 36;

5 The final word? Arnold v Britton [2015] UKSC 36 Lord Neuberger: The reliance placed in some cases on commercial common sense and surrounding circumstances (e.g. in Chartbrook) should not be invoked to undervalue the importance of the language of the provision which is to be construed. meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. While commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed.

6 And now.wood v Capita Insurance Services Ltd [2017] UKSC 24 (29 th March 2017) The Issues: (1) Had the Supreme Court rowed back in Arnold from the guidance given in Rainy Sky? (2) Does one start (a) by construing the language and then view its commerciality or (b) with commercial considerations and then look at the language? (!)

7 And now.wood v Capita Insurance Services Ltd [2017] UKSC 24 (29 th March 2017) The Issues: (1) Had the Supreme Court rowed back in Arnold from the guidance given in Rainy Sky? (2) Does one start (a) by construing the language and then view its commerciality or (b) with commercial considerations and then look at the language? (!) WHOOPS! [Counsel] did not have the opportunity to develop this argument as the court stated that it did not accept the proposition that Arnold had altered the guidance given in Rainy Sky. The court invited him to present his case without having to refer to the well known authorities on contractual interpretation, with which it was and is familiar. [8]

8 Wood v Capita Insurance Services Ltd [2017] UKSC 24 (29 th March 2017) Lord Hodge: It is not appropriate in this case to reformulate the guidance given in the Rainy Sky and Arnold cases; the legal profession has sufficient judicial statements of this nature. [!] [12] This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated:. To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each. [14] On the approach to contractual interpretation, the Rainy Sky and Arnold case were saying the same thing.

9 Some examples: (1) Vitol E & P v Africa Oil and Gas [2016] EWHC 1677 (Comm)

10 Some examples: (1) Vitol E & P v Africa Oil and Gas [2016] EWHC 1677 (Comm) SPA and Construction of the phrase the drilling of the Lideka East Well is not commenced Does commencement of drilling here mean the initial turning of the drill bit into the seabed (also known as spudding ), as Vitol contends or does it refer to a broader concept of the drilling process as a whole which commences with mobilisation of the rig, as AOGC contends? I first consider whether there is a natural interpretation of the words commencement of drilling. I find that there is and it is the physical penetration of the seabed i.e. spudding. This is to be distinguished from preparations for drilling. Drilling is itself not a momentary process and so it is perfectly sensible to speak of when drilling starts, in the spudding sense, and when it stops. That is the sense in which one would define drilling the road or the drilling of one's teeth by a dentist. I further find that commencement naturally means the beginning of drilling, not the beginning of preparations for drilling It is first said by AOGC that this wider interpretation must have been intended since the protection conferred upon it was time-limited to begin with and so it would be unfair if AOGC did not have as much protection as possible. the fact that AOGC may (now) perceive the outcome as unfair is irrelevant where on no sensible view can it be said that Vitol's interpretation produces commercially absurd or unworkable or objectively unreasonable results.

11 Some examples: (2) BP Gas v Sonatrach [2016] EWHC 2461 (Comm)

12 Some examples: (2) BP Gas v Sonatrach [2016] EWHC 2461 (Comm) Joint Shipper's Agreement ( JSA ) Clause D2.2.2(ii)(b) of the JSA provided for allocation of nitrogen costs (allocated by Grain LNG Limited to BP and Sonatrach in respect of nitrogen added to LNG cargoes imported through Grain's terminal according to a formula [.]the variable component of nitrogen costs allocated by Grain to the Shipper shall be allocated in accordance with the quantity of gas Sent Out and the quality of the LNG delivered by each Co-Shipper (the delivering Co-Shipper) as follows: XMA = TCM TN2A / TN2A + TN2B Where: TN2A and TN2B is calculated as the product of:[ ] (ii) The greater of X or Y, Y is the correction factor for Wobbe (tonnes of nitrogen N2 per GWh) calculated as follows: ((weighted average higher heating value of LNG as delivered by the delivering Co- Shipper (in the case of TN2A) or the other Co-Shipper (in the case of TN2B) in the month (M) / (LNG molar weight) ˆ 0.5) )

13 Nitrogen Costs shall be allocated as follows, by reference to all relevant terms as they are defined in, and by measuring all relevant units in accordance with, the Services Agreement and the document entitled GLNG Agreed Network Entry Provisions dated 20 June 2003 and initialled on behalf of GLNG and the Shipper: (a) the fixed component of nitrogen costs allocated by Grain to the Shipper shall be borne equally by the Co- Shippers; and (b) subject to Section D2.2.2(ii)(c) the variable component of nitrogen costs allocated by Grain to the Shipper shall be allocated in accordance with the quantity of gas Sent Out and the quality of the LNG delivered by each Co-Shipper (the delivering Co-Shipper) as follows: XMA = TCM TN2A / TN2A + TN2B Where: XMA is the cost of nitrogen to be borne by a delivering Co-Shipper with respect to a month (M); TCM is the total cost of nitrogen with respect to the month (M) TN2A is the quantity of nitrogen used by the delivering Co-Shipper in the month (M) TN2B is the quantity of nitrogen used by the other Co-Shipper in the month (M) where each of TN2A and TN2B is calculated as the product of: (i) gas Sent out in Gwh in the month by the delivering Co-Shipper (in the case of TN2A) or by the other Co- Shipper (in the case of TN2B); and (ii) The greater of X or Y, where: X is the correction factor for incomplete combustion factor (tonnes of nitrogen N2 per GWh) calculated as follows: ((weighted average higher heating value of LNG as delivered by the delivering Co-Shipper (in the case of TN2A) or the other Co-Shipper (in the case of TN2B) in the month (M) 6.35) ) 5.83 Y is the correction factor for Wobbe (tonnes of nitrogen N2 per GWh) calculated as follows: ((weighted average higher heating value of LNG as delivered by the delivering Co-Shipper (in the case of TN2A) or the other Co-Shipper (in the case of TN2B) in the month (M)/(LNG molar weight) ˆ 0.5) 51.41)

14 Some examples: (2) BP Gas v Sonatrach [2016] EWHC 2461 (Comm) is proxy for, or is short-hand, or a dictionary definition for, the average monthly operational Wobbe index value used for LNG blending and regasification at the Terminal from time to time. At first blush, at least, that would appear to be a challenging submission based on the express language of clause D2.2.2(ii)(b). 1. the figure of 51.41, like all other figures in the formula, is a numerical value, and as such is a constant. 2. a situation where an event subsequently occurs which was plainly not intended or contemplated by the parties judging from the language of the contract. In such a case if it is clear what the parties would have intended the court will give effect to that intention (emphasis added).. 3. Sonatrach has to say that it is clear that the parties would have intended the element in the formula to mean the average monthly operational Wobbe index value used for LNG blending and regasification at the Terminal from time to time,

15 Some examples:(3) Scottish Power UK Plc v BP Exploration Operating Co Ltd Long term gas SPA: breach of term (cl. 7.1) as to operation of facilities to produce deliverable gas Article 1.1: underdelivery : a failure by the Seller to deliver an amount of Natural Gas which the Seller was obliged to deliver in accordance with the Buyer's proper nomination and of which the Buyer was able to accept delivery. Article 16.1: In respect of any Day on which an underdelivery occurs, a quantity equal to the difference between the amount properly nominated under this Agreement and the amount delivered by the Seller shall be calculated and such quantity shall be classified as Default Gas'. Article 16.6 The delivery of Natural Gas at the Default Gas Price and the payment of sums due in accordance with the provisions of Clause 16.4 shall be in full satisfaction and discharge of all rights, remedies and claims howsoever arising whether in contract or in tort or otherwise in law on the part of the Buyer against the Seller in respect of underdeliveries by the Seller under this Agreement, and save for the rights and remedies set out in Clauses 16.1 to 16.5 (inclusive) and any claims arising pursuant thereto, the Buyer shall have no right or remedy and shall not be entitled to make any claims in respect of any such underdelivery.

16 Some examples:(3) Scottish Power UK Plc v BP Exploration Operating Co Ltd 1. carefully drafted long-term contracts for the supply of natural gas. 2. Improbable intention.. that, in relation to a quantity of gas for which the Buyer had automatically received an equivalent amount of Default Gas as compensation for its nondelivery, Scottish Power should also be free to pursue a claim for another remedy for the failure to deliver the same quantity of gas. 3. Non delivery would be due to (i) a deliberate decision not to supply; (ii) some failure on the part of the Sellers to comply with their obligations under Article 7.1 to the Standard of a Reasonable and Prudent Operator; (iii) some non-negligent accident or mishap; or (iv) some natural e.g. geological cause. If Scottish Power is right, Article 16.6 operates so as to confine the remedy to Default Gas only in relation to categories (iii) and (iv) and, presumably, to category (i) if, but not unless, there is no breach of Article Modern Engineering v Gilbert-Ash the strength of the presumption is reduced in proportion to the degree of derogation from the common law position [30] 5. Article 16.6 is not a pure exclusion clause. [it] replaces common law rights with a different contractual remedy which may, in certain circumstances be more valuable than the right to damages

17 The Commercial Meaning : Is the Tide In or Out? A new (slightly) more literal dawn? Conclusions to be drawn: 1. PRESUMPTIONS (GILBERT ASH / CONTRA PROFERENTEM): resort to technical drafting presumptions and canons of construction to narrow the language or exclude what its natural sense might have been thought to be may fare less well in the context of a sophisticated mutually balanced O&G or energy contract. 2. LANGUAGE: resort to what is a commercial solution will only have force where the language approached textually in the factual matrix - really permits of two results. 3. CHANGES OF CIRCUMSTANCE: if the parties have not catered for it, likely to be fixed with the meaning which made sense as a matter of language at the time the contract was made.

18 Future-Proofing? 1. Complete Code or Limited Code applicable only in certain circumstances / premised on a non-breach situation? 2. Premises on which an arrangement is based (especially long term contracts): spell them out and make provision for change (RPI in Arnold; Changes in the Wobbe Index in Sonatrach). 3. Better definitions / clearer definitions (Vitol E&P: why assume?) 4. Cross-referencing / explanation of relationship of clauses (cf BP v Scottish Power: Moore Bick LJ s question -why no reference to Cl in Cl. 16?)

19 B. Exclusions, Mutual Exclusions and Transocean Drilling v Providence Resources (The Arctic III)

20 Transocean v Providence (The Arctic III): the (very) narrow issue of construction For the purposes of this Clause 20 the expression Consequential Loss shall mean: (i) any indirect or consequential loss or damages under English law, and/or (ii) to the extent not covered by (i) above, loss or deferment of production, loss of product, loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption, loss of revenue (which for the avoidance of doubt shall not include payments due to CONTRACTOR by way of remuneration under this CONTRACT), loss of profit or anticipated profit, loss and/or deferral of drilling rights and/or loss, restriction or forfeiture of licence, concession or field interests

21 Transocean v Providence (The Arctic III): the (very) narrow issue of construction Claim by Providence for wasted spread costs during period of wrongful downtime. Transocean rely on Clause 20(ii). Despite Clause 20 s length the critical words (per CA at [16]) were short:... loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption Providence argued loss of use as a concept naturally refers to the loss of the ability to make use of some kind of property or equipment and a claim for loss of expected profit or benefit from that use. Therefore NOT wasted costs.

22 The Court of Appeal [2016] EWCA Civ 372: General approach: not a typical Exclusion Clause Held: spread costs excluded. Court was influenced by the mutual risk allocation aspect: 1) Although clause 20 is an exclusion clause, it has certain characteristics which differ from a typical exclusion clause, by which a commercially stronger party seeks to exclude or limit liability for its own breaches of contract. In this case the parties are of equal bargaining power and have entered into mutual undertakings to accept the risk of consequential loss flowing from each other s breaches of contract. [14] 2) MUTUAL: nor does it have a role to play in relation to a clause which favours both parties equally, especially where they are of equal bargaining power. In the case of a mutual clause such as the present clause 20 it is impossible to say who is the proferens and who the proferee. But: Cf. Ease Faith v Leonis [2006] 1 Ll. Rep. 673

23 The Court of Appeal [2016] EWCA Civ 372: An exclusion clause, Jim, but not as we know it

24 Approved and endorsed: Persimmon v Ove Arup [2017] EWCA Civ 373 The Facts Various issue arose as to the application and meaning of exclusion and limitation clauses. in particular as to the following: liability for any claim in relation to asbestos is excluded. Liberal approach taken, following Transocean Jackson LJ: Exemption clauses are part of the contractual apparatus for distributing risk. There is no need to approach such clauses with horror or with a mindset determined to cut them down. [57] FUTURE-PROOFING? Don t be beguiled spell it out. The more liability being excluded or limited, the clearer and more explicit it should be.

25 C. Special Varieties of Exclusion / Breach Clause

26 (1) Consequential Loss Clauses

27 (1) Consequential Loss Clauses. Or the Balland-Chain problem A good (or bad) example..clause 14(c) of SUPPLYTIME Headed: Consequential damages Consequential damages shall include, but not be limited to, loss of use, loss of profits, shut-in or loss of production and cost of insurance, whether or not foreseeable at the date of this Charter Party. Cf SUPPLYTIME 89: Neither party shall be liable to the other for any consequential damages including but not limited to loss of use, loss of profits, shut-in or loss of production and cost of insurance.

28 or the Ball-and-Chain problem Ease Faith Ltd v Leonis Marine Management Ltd [2006]1 Lloyd s Rep 67 (Andrew Smith J.) - other Ferryways NV v. Associated British Ports (The Humber Way) [2008] 1 Lloyd s Rep 639 (Teare J.) - including but not limited to

29 (1) Consequential Loss Clauses Scottish Power UK Plc v BP Exploration Operating Co Ltd [2015] EWHC 2658 (Comm); Applying the distinction drawn in McGregor on Damages (19th Edn, 2014) at paras , the difference between the contract price and the market price of the goods is the normal loss. All losses going beyond the normal measure may naturally be described as consequential losses which is the description adopted by McGregor. I respectfully agree with the late Harvey McGregor that, as he maintained over many editions of his treatise, this unnatural interpretation of the term consequential loss is to be deprecated: Transocean Drilling U.K. Ltd v Providence Resources Plc [2016] EWCA Civ 372 See the line of cases that includes Saint Line v Richardsons Westgarth & Co Ltd, Croudace Construction Ltd v Cawoods Concrete Products Ltd and Deepak Fertilisers Ltd v ICI Chemicals and Polymers Ltd. It is questionable whether some of those cases would be decided in the same way today, when courts are more willing to recognise that words take their meaning from their particular context and that the same word or phrase may mean different things in different documents.

30 . A new Star to navigate by?

31 Star Polaris LLC v HHIC-Phil Inc [2016] EWHC 2941 (Comm): Judgment of Sir Jeremy Cooke (1) The specific context in which the wording was used, namely as part of a complete code of shipbuilder s responsibility, was crucial to a proper understanding of the term and of fundamental importance in considering the ambit of Article IX [10]. (3) in such circumstances, the word consequential had to mean that which follows as a result or consequence of physical damage, namely additional financial loss other than the cost of repair or replacement [36]. In other words, the clause extended to all loss and damage which was a consequence of the defect covered under the guarantee and the word 'consequential' was used by the parties in this agreement in its cause-and-effect sense, as meaning following as a result or consequence of [6]. (4) In the context of a guarantee and warranty clause which imposed a scheme of responsibilities on the builder, it was held to be unrealistic and strained to read the exclusion as saying that the builder accepted responsibility under the complete code for all direct losses (limb 1) while excluding responsibility only for indirect ones (limb 2): [35].

32 Don t party too soon! Is this the beginning of the end for Croudace v Cawoods? Sir Jeremy Cooke at [18] In my judgment Teare J has expressed the position accurately as a matter of the general approach of the courts when construing a contract with phraseology of the kind found here and the Yard did not seek to persuade me otherwise. What is said by..the Yard, however, is that the Contract shows that this well- recognised meaning was not the intended meaning of the parties and that the line of authorities is therefore nothing to the point. yways NV v Associated British Ports [2008] 1 CLC 117, per Teare J at paragraphs 82-84: Where a party seeks to protect himself from liability for losses otherwise recoverable by law for breach of contract he must do so by clear and unambiguous language... In the light of the well- recognised meaning which has been accorded to such words in a variety of exemption clauses by the courts from it would require very clear words indeed to indicate that the parties' intentions when using such word was to exclude losses which fall outside that well recognised meaning : a salutary lesson that a mechanistic application of the settled meaning of this phrase is inappropriate: the context and purpose may show that the parties used the term in a different and simpler sense.

33 Don t party too soon! Is this the beginning of the end for Croudace v Cawoods? Sir Jeremy Cooke at [18] In my judgment Teare J has expressed the position accurately as a matter of the general approach of the courts when construing a contract with phraseology of the kind found here and the Yard did not seek to persuade me otherwise. What is said by..the Yard, however, is that the Contract shows that this well- recognised meaning was not the intended meaning of the parties and that the line of authorities is therefore nothing to the point. Ferryways NV v Associated British Ports [2008] 1 CLC 117, per Teare J at paras : In the light of the well- recognised meaning which has been accorded to such words in a variety of exemption clauses by the courts from it would require very clear words indeed to indicate that the parties' intentions when using such word was to exclude losses which fall outside that well recognised meaning BUT: still a salutary lesson that a mechanistic application of the settled meaning of this phrase is inappropriate: the context and purpose may show that the parties used the term in a different and simpler sense.

34 Future-proofing? Easy! Make consequential or Indirect Loss an entirely separate and stand-alone head of EXCLUDED LOSS. Identified specific heads = completely excluded. Cf LOGIC Conditions or new BIMCO Offshore Forms Notwithstanding anything else contained in this Charter Party neither party shall be liable to the other for: (i) loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of any tier or by third parties), loss of profits or anticipated profits; loss of product; loss of business; business interruption; loss of or deferral of drilling rights; loss, restriction or forfeiture of licences, concession or field interest; loss of revenue, shut in, loss of production, deferral of production, increased cost of working; cost of insurance; or any other similar losses whether direct or indirect; and (ii) any consequential or indirect loss whatsoever

35 (2) Penalty Clauses

36 (2) Penalty Clauses post Makdessi v Cavendish Square [2015] UKSC 67 Look to the substance: Lords Sumption and Neuberger stated in Cavendish at [15]: the classification of terms for the purpose of the penalty rule depends on the substance of the term and not on its form or on the label which the parties have given to it. Price Adjustment or Change of Consideration Clauses I see no principled reason why the law on penalties should be confined to clauses that require the contract-breaker to pay money in the event of breach and not extend to clauses that in the same circumstance allow the innocent party to withhold moneys which are otherwise due. Indeed, there is ample authority to support the view that clauses which allow the innocent party to withhold payments on breach may be unenforceable as penalties where the sums retained are, or may be, wholly disproportionate to the loss suffered by the withholding party : Lord Hodge [226]; Lord Mance [152]

37 (2) Penalty Clauses post Makdessi v Cavendish Square [2015] UKSC 67 Lord Mance: [152]: What is necessary in each case is to consider, first, whether any (and if so what) legitimate business interest is served and protected by the clause, and, second, whether, assuming such an interest to exist, the provision made for the interest is nevertheless in the circumstances extravagant, exorbitant or unconsciable. Lord Hodge: [255]: the contractual provision that applies on breach is measured against the interest of the innocent party which is protected by the contract and the court asks whether the remedy is exorbitant or unconscionable. Future-proofing? If there is a commercial rationale /legitimate business interest : explain it / demonstrate how the adjustment works and what it is reflecting.

38 An example. If any of the actual quality parameters of the Goods exceeds the minimum/ maximum values provided by the clause 1.4 of the present Annex in accordance with the procedure specified in the clause 4.8 of the Contract, the actual price is to be adjusted as follows: If [content of X] in the batch of the Goods is more than 30.0%, and/or total moisture as received basis is more than 12.0%, and/or the actual net calorific value as received basis is less than Z kcal/kg the actual price is to be set at the amount of 10% of the base price, indicated in the clause 2 of the present Annex. Does the Buyer have a legitimate business interest in receiving the product with a 30% or lower X content etc? If it does, how is the tenfold price decrease in the event of non-compliance, however slight, proportionate or justifiably protective of that interest? Why is the price reduction required over and above the ordinary properly compensatory measure pursuant to section 53(3) of the Sale of Goods Act 1979?

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40 Thank you for your attention. SIMON RAINEY Q.C., 2017 Quadrant Chambers All rights reserved: no part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, scanning, recording in any information storage or retrieval system without the prior written permission of the author.