Practical Law

Trying to find a way around an exclusive remedies clause is a familiar challenge. The contract provides the parties with the right to make certain claims against each other pursuant to a specified process. There is a clause that provides that the right to make claims under the contract constitutes the parties’ sole and exclusive remedies.

If, for whatever reason, one of the parties cannot utilise the contract’s code for claims, the question arises: is there any way around what seems to be an exclusive remedies regime?

The Court of Appeal’s decision in Scottish Power UK plc v BP Exploration Operating Company Ltd provides a good opportunity to re-visit the applicable principles in an area in which there is a surprising disparity between, on the one hand, the significance of the topic and the frequency with which it arises and, on the other hand, the relative paucity of authority dealing with it.

Exclusive remedies clauses

Exclusive remedies clauses are perfectly permissible. In Strachan & Henshaw v Stein Industrie (UK), which remains the leading authority, the Court of Appeal observed that if parties wished to limit their potential liability to one another by such a scheme then there was:

“… no reason why the law should stand in their way and prevent them from doing so.”

The commercial sense in the parties limiting themselves to a contractual code for the making of claims is obvious. In that regard, the particular aims or advantages of doing so may include imposing requirements to give notice on all claims, limiting the time periods in which claims can be made, or simply curtailing what might otherwise be very wide-ranging liabilities arising in connection with a commercial contract. No doubt that is why exclusive remedies clauses are a familiar feature of onshore and offshore construction contracts, PFI agreements and many other long-term contracts for the supply of goods and services.

However, while direct challenges to exclusive remedies regimes are uncommon, disputes frequently arise in which one party seeks to argue that a particular type of claim falls outwith the contractual regime or is otherwise permissible on a proper construction of the clauses in question.

Scottish Power UK plc v BP Exploration Operating Company Ltd

Scottish Power entered into a series of long term gas sale and purchase agreements with BP, the operators of a gas field in the North Sea (the Agreements). Article 7.1 of the Agreements imposed an obligation on BP to repair, maintain and operate the relevant natural gas facilities to the standards to be expected of a skilled and experienced operator.

Under the Agreements, BP was obliged to deliver each day the quantity of gas that Scottish Power had nominated. Article 16 of the Agreement then set out a contractual regime dealing with the consequences of underdeliveries (that is, a failure to deliver the quantity of gas nominated).

It created a scheme by which:

• A quantity representing the difference between the amount of gas nominated by Scottish Power and that actually delivered by BP was referred to as “default gas”.
• The price payable for default gas was 70% of the regular contract price for the gas.
• Scottish Power was entitled to draw down gas at that lower default gas price until the full quantity of default gas to which it had accrued an entitlement had been exhausted.

The key provision was Article 16.6 which provided:

“The delivery of Natural Gas at the Default Gas Price….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 [Scottish Power] in respect of underdeliveries by [BP] under this Agreement, and save for the rights and remedies set out in Clauses 16.1 to 16.5 … [Scottish Power] shall have no right or remedy and shall not be entitled to make any claims in respect of any such underdelivery.”

In May 2011, BP decided to close down the relevant gas facilities for a period of three and a half years for operational reasons. During that period, Scottish Power continued to make its daily nominations but no gas was delivered by BP.

Scottish Power brought proceedings claiming damages for breach of Article 7.1 of the Agreements on the basis of BP’s failure to operate the facilities during the relevant period. It claimed the difference between the contract price and the amount it had to pay for substitute natural gas instead, said to be approximately £85 million.

BP was found to have been in breach of its obligations under Article 7.1 to operate the facility. The key area of dispute between the parties was whether Scottish Power’s rights and remedies in respect of such breaches were confined to its entitlement to delivery of natural gas at the lower default gas price, such that it could not advance its damages claim for breach of Article 7.1.

The presumption against giving up rights and remedies

Scottish Power based its argument on the well-known observations of Lord Diplock in Gilbert-Ash v Modern Engineering that there is a starting presumption that parties do not intend to give up rights or claims that the general law gives them. It then argued for a confined reading of the code created by Article 16 of the Agreements, suggesting that its claim was not one “in respect of underdeliveries” within the meaning of those words as used by Article 16.6 because it was not a necessary part of its cause of action to establish that there had in fact been any underdelivery.

It submitted that:

• Since there were two possible meanings of the relevant contractual provisions, the presumption identified by Lord Diplock led to the result that Scottish Power should not be taken to have given up very valuable contractual rights.
• The contrary conclusion would render the obligations imposed by Article 7.1 meaningless or would reduce them to mere statements of intent.

The Court of Appeal disagreed. Perhaps unsurprisingly, it considered it to be clear that the contractual remedial regime in respect of underdeliveries was intended to be comprehensive and Scottish Power’s construction to be strained and uncommercial.

Reference to the presumption of construction identified by Lord Diplock in Gilbert Ash is the most frequent route by which a party will seek to evade the effect of an exclusive remedies clause. For that reason, the short shrift given to the point in the present case is of wider interest. The Court of Appeal emphasised that, when interpreting a contractual clause, it was necessary to exercise all the tools of construction – linguistic, contextual, purposive and common sense analysis – to discern what the clause really means. If, having done so, the answer becomes clear:

“… the court should give effect to it even though the interpretation may deprive a party of a right at law which he might otherwise have had. It is open to parties to make an agreement which has that effect.”

To resolve an ambiguity by reference to the presumption was the wrong approach.

Conclusion

The Court of Appeal’s sense that relying on the Gilbert Ash presumption is a little outdated is part of a wider trend. It expressed a similar view in the context of an exclusion clause in Transocean Drilling UK Ltd v Providence Resources plc, as Paul Bury noted last year.

More broadly, this decision is also consistent with the Supreme Court’s current emphasis on the relationship between text and context following Arnold v Britton and, more recently, Wood v Capita Insurance. If, having engaged in the unitary exercise of construction and having made use of the various tools available to it, the court comes to a particular view as to its meaning, resorting to any presumption or aid to construction is going to be of decidedly limited utility. Further, the position is no different even if the conclusion means that a party has lost a right or remedy it would otherwise have had. As Moore-Bick LJ put it in Transocean, more is needed before the courts are willing to interfere with:

“… the freedom of two commercial parties to determine the terms on which they wish to do business.”