Contracting and Contract Management: All Change … or Business as Usual?

A number of A&O colleagues from the London arbitration team recently attended the Annual Energy Disputes Seminar hosted by Quadrant Chambers, entitled “Energy Disputes: Lawyering Your Way to a Solution”.

During the evening Simon Rainey QC gave his take on the emerging principles of contractual interpretation in energy disputes. He ran through the following examples:

• Vitol v Africa Oil,  in which the interpretation of a deferred consideration clause turned on when the drilling of a proposed well began. Applying Arnold v Britton, the court held that the starting point for its analysis was to consider the “natural” meaning of the words “commencement of drilling” and that, in such case, there was no reason to adopt a wider interpretation of the clause.
• BP  v Sonatrach, in which the court held – in construing a formula for the allocation of nitrogen costs arising out of an agreement to import cargoes of liquefied natural gas – that where an event occurs at a later point in time which was plainly not “intended or contemplated” by the parties then, judging from the contractual language, it is only where it is clear what the parties would have intended that the court will give effect to that intention.
• Scottish Power v BP, in which the Court of Appeal, considering Scottish Power’s entitlement to compensation under a series of long-term gas sale and purchase agreements, held that where there are two possible meanings to a clause, the court must apply “all its tools of linguistic, contextual, purposive and common sense analysis to discern what the clause really means”. If, as a result of doing so, the answer becomes apparent, the court should give effect to that result, even though the interpretation may deprive the party of a right at law which he might otherwise have had.

Drawing together the above, Rainey QC suggested that a number of interesting themes have emerged, in particular: (i) recourse to “technical drafting presumptions and canons of construction” to narrow contractual language or exclude its natural meaning may “fare less well” in the context of sophisticated Oil & Gas or energy disputes, (ii) consideration of the “commercial solution” will only have force where the language itself (approached “textually in the factual matrix”) permits two interpretations, and (iii) in cases where there has been a change in circumstances and the parties have not made provision for this, it is likely that the meaning ascribed to the clause will follow that which made sense at the time the contract was entered into.

As a matter of practice, parties should consider the above principles when assessing the merits of a dispute, including whether the prospect of an unfavourable interpretation by the court has any bearing on the settlement of that dispute. For those contracts that are yet to be entered into, parties should try their best to “future proof” their agreement to ensure adequate protection in the event that a dispute arises. This may be by explaining the interplay between clauses in further detail, providing for more comprehensive definitions, or expressing the premise of the parties’ arrangements more clearly in the contract.