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Case No.: A3/2000/0007 QBCMI
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION Commercial Court
The Honourable Mr Justice Thomas
Royal Courts of Justice
Strand, London, WC2A 2LL
Date:31 July 2000
B e f o r e :
LORD JUSTICE ROCH
LORD JUSTICE TUCKEY
and
LORD JUSTICE MANCE
|
BLUEWATER
OPERATIONS (UK) LTD
|
Appellants
|
|
and
|
|
|
AMERADA
HESS LTD
|
Respondents
|
- - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Jonathan Sumption Q.C. and Dominic Chambers (instructed by Watson,
Farley & Williams) appeared for the Appellants
Mark Barnes Q.C. and David Cavender (instructed by Herbert Smith)
appeared for the Respondents
- - - - - - - - - - - - - - - - - - - -
Judgment
As Approved by the Court
Crown Copyright
LORD JUSTICE MANCE:
1. The appellants (who are the claimants in this litigation) appeal from the
judgment of Thomas J. dated 30th November 1999 under CPR Part 24,
dismissing their claim in respect of five specimen invoices. By these invoices
the appellants (a sister company of BOPS entitled to payment under the
agreement by virtue of an assignment from BOPS dated 14th December
1994) had sought various fee and operating payments in respect of a period of
over 4 months during which the Floating Production, Storage and Offtake
Facility (FPSO) which they had provided to the respondents (AHL) was away from
its normal North Sea location or site. It was away for dry-docking and repairs
following a serious incident resulting from over-pressurization of a tank.
2. The background can usefully be taken from the Judge's own judgment:
"Background
The defendant (AHL) has interests in various oil fields located on the UK
Continental Shelf in the North Sea, including the Fife Field (which is some 200
miles off Aberdeen) and the Fergus Field. On 25 March 1994, AHL agreed with a
sister company of the claimants, a Maltese company called Bluewater Offshore
Production Systems Limited (BOPS) that BOPS would provide AHL with a Floating
Production, Storage and Offtake facility (FPSO) in the Fife Field (the Field).
The FPSO was to be a tanker formerly owned by Maersk and converted at BOPS'
expense. The FPSO was to be anchored in the North Sea and operated as a
facility where crude oil could be extracted from the sea bed through pipelines
connected to the FPSO; the oil could be separated, the gas flared and the
useable crude oil stored on the FPSO pending offtake by other tankers. The
FPSO provided by BOPS was named "Uisge Gorm"; the capital cost borne by BOPS is
said to be about $180m and to have been financed in part by a syndicated loan
of $100m.
On 14 December 1994, BOPS assigned to the claimants the rights to payment under
the agreement between BOPS and AHL.
By a variation order (number 9) agreed in about October 1995 but not formally
executed until July and September 1996, BOPS agreed to carry out additional
works so that the FPSO could be used as a FPSO for AHL's Fergus Field. There
was a further variation order (number 13) taking effect in September 1995, but
not formally executed until September 1996, which allowed BOPS further payments
on a daily basis known as an "Additional Operating Rate" and an "Onshore
Support Fee"; this variation was expressed to be
"Without prejudice to the terms and conditions of the Agreement, the following
supplemental provisions shall apply to the Agreement, Appendix II......"
In April 1998, in circumstances which it will be necessary to describe in a
little more detail, AHL and the claimant executed a document entitled "Heads of
Agreement". This was an agreement which purported to take effect between AHL
and BOPS and amended the terms of the original agreement. It is common ground
that the document was put forward by AHL and its purpose was to provide BOPS
with greater incentives to increase production. The Heads of Agreement was
drafted by engineers (and apparently never seen by lawyers). It was intended
that it would be formalised in due course; there is a dispute between the
parties as to the manner in which it was intended that it would be formalised.
However it was never formalised prior to the incident which has given rise to
the present dispute and thus the agreement must stand in its actual terms
without reference to the proposed formalisation. There is also an issue
between the parties as to the capacity or manner in which the claimants
executed the Heads of Agreement and the manner in which it is alleged this
affected BOPS. It has been agreed, however, that this issue should stand over
until I have determined the issues of construction raised on this
application.
By variation order number 32 (effective from August 1998) increases were made
to the rates in accordance with the escalation provisions.
On 4 April 1999 there was a serious incident on the FPSO. One of the tanks
became over pressurised and production ceased. An investigation and inspection
were carried out at site and it was decided that the FPSO would have to be
taken from the Field to dry dock for repairs. The FPSO was taken from the
Field to dry dock at Rotterdam, repaired, tested and inspected. She left
Rotterdam on 25 July 1999 to return to the Field. Full operations resumed on
11 August 1999.
The claimants invoiced AHL for the period during which the FPSO was away from
the Field; they contend that they are entitled to be paid whilst the FPSO was
away from the Field under the Heads of Agreement and under the variation
relating to the Fergus Field. AHL deny that they are entitled to the payments
claimed; they adopted this contention at the time it was contemplated that the
FPSO would have to be taken from the Field and have maintained this
position.
The Claim Form was issued on 21 June 1999 in respect of various invoices; the
present application in respect of some of those invoices was issued on 29 July
1999. A defence was filed on 16 August 1999. The hearing before the court was
confined to five invoices, but it was clear that the entitlement of the
claimants to payment depended upon certain issues relating to the construction
of the agreements to which I have referred.
It is the claimants' case that the effect of the Heads of Agreement was to make
a significant change to the original agreement so that they were entitled to
payment even if the FPSO was away from the Field. Quite independently, they
contend that, even if they are incorrect on that issue, they are nonetheless
entitled to additional payment under the variation relating to the Fergus
Field."
3. The original agreement was long-term in nature. It related initially to the
Fife Field alone. By clause 14 it was to continue until 7 years after the
Department of Trade's grant of a certificate of fitness for that Field. But
clause 14.2 conferred on AHL "unlimited successive options each of up to one
(1) year with regard to the Fife Field and thereafter unlimited successive
options to extend the time of the Agreement for further projects ..."
4. The Judge summarised the terms of the original agreement in a manner which I
can again, gratefully, adopt:
"The terms of the original agreement
The scope of BOPS's obligations were set out in the body of the original
agreement of 25 March 1994. By the terms of clause 2.1, BOPS
"shall ... with due care and diligence, design, manage and perform the
Conversion, provide crew to operate and maintain the FPSO, conduct and perform
Production Operations to ensure the safe and efficient production and
offloading of hydrocarbons...".
By the terms of clause 2.3 BOPS were to ensure production operations were
performed "promptly, efficiently, safely, industriously, diligently and to a
professional standard consistent with good and safe" UK Continental Shelf
Offshore operations. By clauses 2.7 and 16.1, BOPS were also responsible for
the maintenance and repair of the FPSO and the rates set out in Appendix II
included all costs in connection with such maintenance.
Clause 17.1 provided that AHL was to pay BOPS in accordance with Appendix II
which was entitled "Schedule of Rates and Prices".
The scope of the work was divided into four phases; this claim was concerned
with phase three - the operating and production phase. During that phase, BOPS
were to be paid in accordance with Appendix II by reference to two basic fees;
what each encompassed was set out in Appendix II:
* a "Facilities Fee" which was a daily rate pertaining to the related capital
costs associated with the provision of the FPSO and the associated lines to the
sea bed. Appendix II made it clear that the significant part of the facilities
fee was due in respect of the capital cost of the FPSO as opposed to the lines
to the sea bed.
* an "Operating Rate" which was a daily rate for the satisfactory performance
by BOPS of its obligation relating to the operation of the FPSO. Appendix II
made it clear that the constituent parts of the operating fee were to cover the
cost of the crew, repairs and maintenance, insurance, management and
miscellaneous items such as food, communications and oils.
The payment of the operating rate and facilities fee was dealt with in clause 3
of Appendix II. Subject to an overriding provision in the body of the
agreement, to which I will refer, clause 3.4 of Appendix II made provision for
the adjustment of the Operating Rate and Facilities Fee; they were payable in
full if the FPSO and other items supplied by BOPS were fully operational for
95% of the time computed over a three month period. They were to be adjusted
upwards if the FPSO was operational for more than 95% of the time, but to be
adjusted downwards to take account of the periods of reduced potential
performance below the 95% standard. It is not necessary to refer to the
details of clause 3.4; in general terms, if time was lost due to force majeure
or breakdowns or stoppages which were within AHL's area of responsibilities,
that counted as operational time for computation of the 95% standard. Where
potential performance was lost for other reasons, then the fee and rate were
adjusted pro rata to take account of reduced potential performance below the
95% standard. Clause 3.5 however, provided that for the first four years of
the agreement the facilities fee would be payable without deduction; it was
common ground that this was a form of "hell and high water" provision inserted
so that the cash flow for the syndicated bank financing on the conversion of
the FPSO could be met. However there was to be an adjustment at the end of the
four year period to reflect the actual operation of clause 3.4.
It is common ground that these provisions were subject to the terms in clause
8.3 of the body of the agreement. Clause 8 made provision for "any tests,
trials, repairs or inspections" other than those requested by AHL to be at the
cost of BOPS. Clause 8.3 then provided that:
"Subject to item 11 of Appendix II, Part A, [which is not material], should
such tests, trials, repairs or inspections become necessary, [AHL] shall permit
the removal of the FPSO from the Field provided that production has been safely
suspended, and in such event:-
(a) No Operating Rate or Facilities Fee shall be payable for the duration of
such tests, trials or inspections from Approved suspension of production until
the FPSO is reinstated on station and ready to assume normal operations; and
(b) the cost of any additional services necessary by reason of such tests,
trials, report and/or inspection including but not limited to, divers, tugs
supply vessels or helicopters shall be at [BOPS]'s sole cost."
It can readily be observed that sub-clause (a) does not contain the word
"repairs" and that sub clause (b) contains the word "report" where the word
repairs would have been expected."
5. The Judge concluded that the word "report" in clause 8.3(b) was a clear
error for "repairs" and that there was a further clerical error in omitting the
word "repairs" from clause 8.3(a). These conclusions are now no longer
challenged.
6. The appellants' case has two limbs. One is limited to the Fergus field, and
affects only two of the five invoices before the court. It depends on the terms
of variation number 9 executed in July and September 1996 with effect from
1st October 1995. The other is general, and potentially affects all
five invoices. It derives from the terms of Heads of Agreement entered into in
April 1998. Each limb involves the submission that the parties agreed, for the
purposes of the variation or the Heads of Agreement respectively, to abrogate
and supersede the provisions of clause 8.3 of the original agreement.
7. The Judge took the limbs in opposite order, reflecting their relative scope.
But I shall take them in chronological order. The variation affecting the
Fergus field was designed to extend the activities of the FPSO to the receipt
and handling of oil from lines laid from that field. The FPSO remained in the
same location, with additional lines connecting it to the Fergus field.
8. The Judge summarised the terms of variation number 9 as follows:
"The terms of the variation
The terms of the variation, unlike other variations, did not state it was
without prejudice to the terms of the original agreement or that it affected
Appendix II only. It provided for the design, installation, operation and
maintenance of facilities for the Fergus Field (referred to as. "Additional
Works"). Clause 3 was entitled "Remuneration for Additional Works"
3.1 [BOPS] shall be reimbursed a day rate of $20,037 on completion of the
Additional Works and for a period of 3 years thereafter. After 3 years, [AHL]
shall only pay the rate in 3.2 below. Any repairs not arising from a failure
to meet the functional specification on the Fergus Facilities upstream of the
Fergus riser flange arising which are not covered by contractor's insurance,
shall if agreed as necessary, be reimbursed at cost plus 5%. Any repairs are
to be carried out as expeditiously as is possible.
3.2 In addition, Contractor shall receive a sum to be mutually agreed per
day in respect of additional operational costs (chemicals, spares, maintenance,
insurance, subsea flowline, riser base and tree inspection, and the like).
Such amount shall be split out and subject to clause 7.4.2 of Appendix II and
to clause 7.4.3, as applicable.
3.3 The provision of sub-clause 3.4 of part A of Appendix II, shall not
apply to the rates associated with the Additional Works.
3.4 The rate in sub-clauses 3.1 and 3.2 above shall be payable by Company
notwithstanding any shutdown of the FPSO or shutdown of production associated
with the facilities provided by the Additional Work."
9. The effect of the variation was, as the Judge said, to provide additional
remuneration to the appellants by a day rate of $20,037 for 3 years (clause
3.1) and in addition (but payable without limitation) a sum in time for
additional operational costs (clause 3.2). Under clause 3.3 of the variation,
these rates associated with the Additional Works were not subject to the
provision[s] of clause 3.4 of Appendix II of the original agreement, whereby
the quantum of payment might vary up or down according to the extent to which
the FPSO was "fully operational .... for .... 95% of the time to be computed
over each three (3) month period". Clause 3.3 of the variation could not
itself bear on or affect the application of clause 8.3. The appellants rely
primarily on clause 3.4 of the variation, which specified the rate[s] in clause
3.1 and 3.2 as payable "notwithstanding any shutdown of the FPSO or shutdown of
production associated with the facilities provided by the Associated Work". The
appellants submit that "shutdown" here embraces not merely shutdown "on site"
in the North Sea, but covers any period when the FPSO is shutdown, whether it
remains on or leaves its North Sea location.
10. Variation number 9 is one of a number of variations fitted carefully into
the general contractual framework. It is (as Mr Sumption acknowledged) the
clear product of lawyerly drafting. The original agreement dealt in quite
different places with circumstances in which the FPSO was not fully operational
(Appendix II, clause 3.4) and with "removal from the Field" involving
consequent "interruption" or "suspension" of production (clause 8.3 of the main
agreement). There is nothing in the terms of variation number 9 which is
expressly directed to clause 8.3 of the main agreement. Had the parties or
their draftsmen envisaged an alteration of clause 8.3, one would have expected
some clear indication to that effect.
11. The reference in the variation to "shutdown" compares with an express
provision in clause 3.4.3 of Appendix II whereby 100% of the time involved
falls, in cases of "complete shutdown or no Production Capacity", to be taken
into account when calculating the proportion of operating time in any three
month period, for the purpose of determining the extent to which the Facility
Fees and Operating Rate are payable under the original agreement. Under Clause
3.4.3 the proportion of operating time taken into account in cases of "Partial
Performance or reduced Performance Capacity" is either pro rata (primary
equipment) or 40% (secondary equipment). Clause 3.3 of the variation excludes
any such calculations in respect of the Fergus Field additional reimbursement.
It would be understandable if the parties and their draftsmen wished to make
expressly clear that this was to be so, even in cases of complete shutdown. But
while they directed themselves, expressly, to clause 3.4 of Appendix II, they
said nothing to suggest that they had in mind either clause 8.3 or
circumstances of "removal from the Field".
12. Mr Sumption submits that this overlooks the fact that Appendix II itself
draws no distinction between shutdown, or "downtime", on and off site. Appendix
II and clause 8.3 anyway involve, in his submission, "overlapping" provisions.
Further, under the original agreement, it did not make much, if any, difference
whether a particular factual situation was analysed under Appendix II or clause
8.3. Indeed it was, he suggested, incongruous that clause 8.3 appeared in the
main body of the original agreement at all. Its logical home was in Appendix
II.
13. Taking these submissions in turn, Mr Sumption observes in relation to the
first that clause 3.4 of Appendix II not only speaks generally of situations in
which the FPSO or equipment is not "fully operational", but requires
three-monthly calculations. It contains nothing to exclude from its ambit or
from such calculations any period when the FPSO is removed from site. The
argument seems to me, however, to go too far. The parties cannot have
contemplated, by the combination of clause 8.3 and Appendix II in the original
agreement, (a) that there should not only be no Operating Rate and Facilities
Fee paid "for the duration of" any period "from Approved suspension of
production until the FPSO is reinstated on station and ready to assume normal
operations" but, on top of this, (b) that the same period should also
count as a period of "Complete Shutdown or no Production Capacity" for the
purpose of calculating a reduction in payment under clause 3.4 of Appendix II.
It is true that neither clause 8.3 nor Appendix II indicates expressly how the
two different schemes inter-relate, in such a way that any double counting of
time against the claimants is to be avoided. But to my mind they must have been
intended to be mutually exclusive. This result could be achieved, in
particular, by pro-rating the three-month period in clause 3.4.3, so as to
reduce it by the length of any period in it for which no Operating Rate and
Facility Fee was payable under clause 8.3.
14. As to the second point, once such pro-rating is undertaken, it may be that
it makes little, if any, difference under the original agreement and Appendix
II, whether a particular case is analysed under Appendix II or clause 8.3. But
that also underlines the fact that the parties, evidently, saw these different
provisions as different schemes covering different situations and so provided
for them in quite different places. Since the parties viewed them as different
situations in their original agreement, one would expect to find some clear
indication of a change of view in this regard, if later the parties decided to
treat them identically. The basic difference between the situations
contemplated by clause 3.4 of Appendix II and clause 8.3 of the main agreement
is, in my judgment, correctly identified as depending upon whether or not the
FPSO remains on site (though subject to shutdown or downtime) or is removed
from the Field. Whether or not the FPSO (a converted oil tanker) retained any
engine with which it could move (a point on which the parties were in curious
disagreement before us), it would clearly require to be removed from the Field
from time to time for routine but lengthy purposes, such as periodical surveys
and overhauls, quite apart from any more unexpected incidents such as led to
the present case.
15. The second point leads into Mr Sumption's third point, that it was always
incongruous to find clause 8.3 in the original agreement, rather than in
Appendix II. Logically, Mr Sumption has to submit that it was always
incongruous to draw any distinction between the two situations of shutdown and
removal from site. But this is what the parties did. Further, there are other
provisions in the original agreement under which the rates and fees otherwise
payable may be reduced to nothing. Clause 24 regulates force majeure, providing
for AHL to reimburse the appellants in accordance with Appendix II during the
first 24 hours and thereafter for the rates and fees payable to be reduced to
zero. Clause 25.1 gives AHL a right to suspend the Contractor's performance for
AHL's own reasons, and by clause 25.3:
"In the event of suspension under sub-clause 25.1 during Production Operations,
requiring the FPSO to leave the Field, Company shall reimburse Contractor the
cost of leaving the Field in a safe state and for transporting the Contractor
Supplied Items to an agreed North Sea port. .... Contractor shall be reimbursed
at the Lay Up Rate in accordance with Appendix II, or its actual reasonable
incurred costs (including the Facilities Fee), whichever is the lesser."
16. The Lay Up Rate under Appendix II is "the Facilities Fee plus 75% of the
Operating Rate." Finally, clause 8.3 itself starts with the words "Subject to
item 11 of Appendix II, Part A". That refers to legislative changes, for which
clause 11.3 of Appendix II provides:
"Should the change in legislation or codes of practice result in the FPSO
requiring to leave the Fife (or other) Field, the following shall also apply,
subject to the threshold [of £500,000] in 11.1 above:
(i) The Operating Rate shall cease to be paid from cessation of production
until recommencement of full production.
(ii) Company shall pay Lay Up Rate during such a period. ...."
17. Mr Sumption disclaimed any suggestion that clauses 24 and 25 of the
original agreement and clause 11 of Appendix II were overridden or affected by
variation number 9 (or by the Heads of Agreement). But their presence and the
references to them in the original main agreement seem to me to confirm that
the parties conceived of a number of situations - some at least could fall
within a broad conception of shutdown or downtime - as falling outside the
scope of clause 3.4 of Appendix II and as requiring special regulation.
18. In these circumstances, I reject without hesitation Mr Sumption's
submission that clauses 3.3 and 3.4 of variation number 9 override clause 8.3
of the original agreement. Their relevant purpose and effect was in my judgment
to amend and replace provisions for payment otherwise contained in Appendix
II.
19. I turn to the Heads of Agreement. Again, I can use the Judge's summary of
the terms and background:
"The terms of the Heads of Agreement
It is convenient first to refer to the terms of the Heads of Agreement. It
contained a preamble which stated:
Amerada Hess perceive an opportunity to restructure the contract to the
mutual benefit of both AHL and Bluewater. It is AHL's desire to increase the
incentives to Bluewater from the date of effect of the contractual change and
to reward Bluewater above normal contractual reimbursement for maximisation of
production subject to safe and sound facilities management......
Incentives, in the form of tariffs, have been formulated to focus on a less
confrontational style of alliance between AHL and BW where there is more of a
"risk and reward" type joint operation......
Contractual penalties have been made more lenient and used as a backstop in
cases where the contractor's performance falls unacceptably below expected
targets. It is intended that the tariff incentives in their own right are
enough to focus the contractor on continual improvement of performance of
production throughput, uptimes and safety performance.
The agreement first dealt with a revised Facilities Fee structure; after
dealing with the rate it provided:
2. The Facilities Fee will remain unaffected by any form of downtime
penalty for an individual period of less than five days unplanned downtime in
any three month period (quarterly) as from the 1st January 1998. Prior to
January 1998, Facilities Fee shall be handled as per existing contract.
3. Amerada Hess maintain the right to apply penalties of half the full
amount of any current Facilities Fee rate, for any individual period of
unplanned downtime in excess of five days in any three month period (quarterly)
in cases where Bluewater does not demonstrate practical best endeavours in
restarting production in full as early as possible.
4. Planned downtime in excess of five days will require to be ratified by
Amerada Hess.
The agreement then provided that in return for this, AHL would incorporate a
series of measures designed to increase BOPS's cash flow and profitability with
the added potential to increase revenue further by improved performance.
First of these, was a new operational tariff based on the production of barrels
of oil, water and gas and an operating oil bonus; paragraph 1.5 of the sections
dealing with this stated:
"The introduction of the operational tariffs shall nullify the method of
payment specified in Appendix II Schedule of rates and prices para 3.4.3 and
3.4.4 Uisge Gorm contract".
The Operating Rate was increased under the heading "Operational Day Rate"; it
was divided as to 60% in respect of crude oil and 40% in respect of water
injection. It was made subject to provisions in respect of downtime. The
provisions relating to crude oil were as follows:
(a) Operational Downtime Allowance, including planned and unplanned
downtime, will be an accumulated 600 hrs/year=6.8% of time. This will be
reviewed at a later time subject to increased production rates and subsequent
cumulative downtime.
(b) Any individual period of unplanned downtime less than 48hrs will not
incur penalty against the Crude Oil Rate but all actual unplanned downtime
hours, however it occurs, will accumulate against the 600 hrs Operational
Downtime Allowance and will be subject to the provisions of (e) below.
(c) Any individual period of unplanned downtime in excess of 48hrs will
incur a penalty of 50% of the Crude Oil Rate pro-rated to an hourly amount =
($24,016.20/2)/24 to the nearest whole hour. The actual downtime hours will
accumulate against the 600hrs Operational Downtime Allowance.
(d) All periods of planned downtime will accumulate against the 600hrs
Operational Downtime Allowance.
(e) If the Operational Downtime Allowance of 600hrs is exceeded in any
calendar year starting from 1/1/98, then every subsequent period of planned or
unplanned downtime will immediately incur a penalty of 50% of the Crude Oil
Rate pro-rated to the hourly amount to the nearest whole hour as illustrated in
(b) above.
The agreements also provided for an operating oil bonus and other payments. A
further term provided for "longevity risks" - the parties were to co-operate to
produce a programme that would endeavour to forestall the requirement to dry
dock the FPSO prior to the abandonment of the fields.
The agreement concluded with a series of numbered paragraphs entitled "Terms
and Options". These referred to the original agreement but clause 5 provided
as follows:
"The proposal to revise the contract represents a complete reimbursement
package for the performance of Bluewater obligations under the contract.
Amerada Hess shall be under no obligation to consider additional reimbursement
in this respect."
The circumstances in which the Heads of Agreement was made
I have already stated that this agreement was prepared by AHL's engineers and
proffered by them. It was the evidence of AHL that they were very keen to
obtain increased production from the fields, but that the effect of Appendix II
of the original agreement meant that BOPS had no incentive to do so; in fact
they considered that BOPS was positively "disincentivised" from doing so
because increased production was likely to lead to additional downtime. This
was because an increase in production would have meant that more would have
flowed through the system which would in turn have meant that, not least for
the reasons of additional maintenance, it was likely that additional downtime
would have resulted. Thus under the terms of the original agreement it was in
BOPS's interest to keep the FPSO operational by keeping production at a rate
that would not cause breakdowns.
The purpose of the Heads of Agreement was therefore to encourage BOPS to
increase production without penalising them for additional downtime; it was to
move away from payment based on operational time to payments based on
production. The claimants accept that that was the common purpose and it is
substantially reflected in the preamble. AHL also set out in a witness
statement served on their behalf, evidence of their subjective intention in
relation to the question as to the intended effect on clause 8.3 in the body of
the original agreement. That is not admissible and I have had no regard to it.
There were other reasons for the Heads of Agreement as referred to in the
preamble, including a desire to lessen the disputes and to extend the period
for which the FPSO would be used."
20. A major plank of Mr Sumption's case was that, whatever the position with
regard to variation number 9, the Heads of Agreement were the product of lay
agreement and drafting. They were intended later to be, but were never in fact,
reduced to more lawyerlike form. Further, as appears by the evidence and the
Judge's judgment, their purpose was to "incentivise" the appellants, by
encouraging the appellants to increase production although this would normally
mean higher downtime. This much is common ground. Mr Sumption submits that the
court should, in these circumstances, view the Heads of Agreement as a complete
code of remuneration, displacing in particular clause 8.3. The Judge, he
submits, went wrong at the point where he said:
"Had the parties intended to vary the main body of the original agreement, the
Heads of Agreement would have contained clear words negating the effect of the
provisions in the body of the original agreement and not merely dealt with the
same subject matter as Appendix II."
21. One difficulty about Mr Sumption's argument is to my mind that it tends to
assume what it has to prove. No doubt the parties intended that the appellants
should receive a more beneficial remuneration package - although the gist of
the last sentence of the Preamble and of clause 5 at the end of the Heads of
Agreement is to emphasise that this was intended to be all that they were going
to get. It still remains to consider precisely how and in what respects the new
package was more beneficial and whether in particular it was designed to
replace or modify Appendix II or to override any exceptions in the original
main agreement to which Appendix II would have been subject. In deciding this
point, I do not consider much assistance is to be gained either from
identifying general references in the Heads of Agreement to, or to
restructuring, the "contract" between the parties or from specific provisions
which by their nature impact, directly or indirectly, on aspects of the
original main agreement. It is clear that many aspects of the original main
agreement are quite untouched by the Heads of Agreement. What matters for
present purposes is whether the Heads of Agreement supersede or override clause
8.3, and that can only be decided by consideration of their particular purpose,
scope and terms.
22. In this context, I, like the Judge, do consider it of potential
significance that the parties made no express mention of clause 8.3, which
must, at least as regards periodical surveys, relate to a relatively common
situation. At one point in his submissions, Mr Sumption himself suggested that
it was "extraordinary that the parties did not mention clause 8.3 if they
intended to retain it". But that reverse argument itself assumes that the
engineer draftsmen would have had clause 8.3 well in mind. If they did, I
prefer the Judge's view that it is more extraordinary that they did not mention
it if they intended to negate it. After all, Appendix II makes no express
reference to clause 8.3, yet that clause in my judgment takes periods off-site
outside the scope of Appendix II. So why should the engineer draftsmen think it
necessary expressly to preserve the operation of clause 8.3, when varying
Appendix II? The engineers' agreement was in truth one in a series of
variations of that Appendix (including variation number 9), none of which had
affected clause 8.3. Further, it seems to me that the force of Mr Sumption's
submissions on this point is weakened by his acceptance that nothing in the
Heads of Agreement can have affected or overridden the provisions of clauses 24
and 25 of the main original agreement or of clause 11 of Appendix II, which
involve other special situations in which the remuneration provided by the
Heads of Agreement is not payable.
23. Mr Sumption also deploys in this context the argument that clause 3.4 of
Appendix II overlaps with clause 8.3 of the main agreement and that there is no
sensible way of separating their respective fields of application in the way
for which AHL contend. The Heads of Agreement must, therefore, supersede both.
I have already considered this argument, in the context of variation number 9.
Mr Sumption submits however that the problems of reconciliation become
insuperable or virtually so, if the Heads of Agreement are treated as leaving
clause 8.3 unaffected, as AHL would propose. How can one apply the provisions
relating to unplanned downtime of less than, or more than, five days in any
three month period (cf the Facilities Fees structure in the Heads of
Agreement), if clause 8.3 remains capable of taking whole periods outside the
Heads of Agreement? How can one give effect to the provision in the Heads of
Agreement for Operational Downtime Allowance, including planned and unplanned
downtime, of 600 hours a year, if periods of months may still be taken out of
any year by the operation of clause 8.3? These questions may involve more
difficult problems of interpretation than those arising under the original
agreement. But I would not accept that they are insoluble. One answer could be
that the engineer draftsmen parties did not craft as sophisticated a scheme as
they would have done, had they expressly directed their mind to the full
implications of its inter-relationship with clause 8.3. That does not mean that
they intended to abrogate clause 8.3. There would simply be a rough and ready
aspect to the inter-relationship in certain situations. Another answer, with
regard to the references to a five day period in any three month period, would
be to pro-rate the five days in the same proportion as any three month period
was affected by a deduction under clause 8.3. It does not seem to me necessary
to investigate, or seek to give a precise answer, to such problems in this
case. As Mr Sumption acknowledges and asserts, the Heads of Agreement are a
non-legal document. They may not anticipate or provide for every complexity.
The complex minutiae of such problems cannot dictate the true scope or
interpretation of the Heads of Agreement in the fundamental respect presently
in issue.
24. I would however add this. Clause 8.3 is directed at situations of removal
from the Field which are inherently likely to last, as the present did, for
periods of time measured in months, rather than days or even weeks. The general
impression conveyed by the length of the periods referred to in the Heads of
Agreement (i.e. five days in any three month period, 48 hours downtime and 600
hours each year) is that they are unlikely to have been formulated either
having in mind, or intending to embrace, the long periods of removal from site
likely under clause 8.3.
25. Whatever the position regarding clause 3.4 of Appendix II, the appellants
submit that the subject-matter language of the Heads of Agreement naturally
embraces clause 8.3. The Heads of Agreement speak of "downtime". Mr Sumption
submits that, although the word is not used in clause 8.3, "downtime" is also
its subject. "Downtime" is however a word used in various places in clause 3.4
of Appendix II. Mr Sumption further submits that clause 8.3 involved
"penalties" which were intended under the preamble to the Heads of Agreement to
be "made more lenient". That seems to me an artificial view of clause 8.3, the
most common application of which would be, as I have indicated, to routine
situations such as periodical surveys. In my judgment, linguistics point away
from, rather than towards, the appellants' case.
26. More substantially, Mr Sumption submits that the Heads of Agreement
could not sensibly fulfil their purpose unless the appellants were being
assured of a consistent and continuing income stream - including during any
period under repair or survey elsewhere than at the site. Only this would
properly motivate them. Further, if this were not so, the appellants would be
exposed to temptation, which might work to AHL's disadvantage - so that AHL
cannot be taken to have intended the scheme which they now assert. It might for
example be in the appellant's interests either to plan or to permit downtime on
site at the Field, rather than to take the FPSO away for speedier and cheaper
repair elsewhere, because the appellants would receive payment while the FPSO
was on site, and not while it was away. This last somewhat self-serving
argument does not greatly impress. The ordinary expectation, that operators
will behave responsibly, is expressed in and underlined by the terms of clauses
2.1 and 2.3 which have already been set out above. The former submission
assumes that, in order to motivate the appellants, it was necessary not only to
improve their remuneration while on site, but also to afford them remuneration
while off-site. There is, economically or commercially, no warrant for that
assumption. Before the FPSO started on site, while she was being converted, no
remuneration was being paid. The original agreement distinguished circumstances
in which the FPSO was on and off site. There is no reason why that distinction
should not have been continued. There is no reason why readiness to pay extra
remuneration in one situation in which it was not previously paid in full
should involve readiness to pay it in the other, different situation. While
downtime on site would increase with production, there is no reason to think
that the frequency of periodical surveys (or even the risk of any such incident
as led to the present litigation) would increase with production.
27. In my judgment, the proper construction of the Heads of Agreement is clear.
There is no ambiguity and no question therefore of construction against AHL. It
is unnecessary to deal specifically with certain points which were raised in
the appellants' skeleton, but not pursued by Mr Sumption in his oral
submissions, including a suggestion that clause 8.3 was anyway incapable of
covering all or some of the fees and operating payments claimed under the five
invoices. The Judge in my view reached the right conclusions in relation to
both variation number 9 and the Heads of Agreement, and I would dismiss this
appeal.
Lord Justice Tuckey: I agree.
Lord Justice Roch: I also agree.
Order: Appeal dismissed; order in favour of the respondent for the costs of
the appeal; detailed assessment of respondent's costs under the community legal
aid scheme; payment on account of £25, 000; leave to appeal
refused.
(Order not part of approved judgment).
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