Long Term Gas Supply: Contract Litigation

Written By H. Martin Kay, Q.C.

A recent English High Court decision provides some useful analysis of several key gas purchase contract issues.

Thames Valley Power Limited ("TVPL") had a long term gas purchase contract with Total Gas & Power Limited ("Total") to supply its electricity generating plant. The gas supply contract was a take or pay contract and provided some elasticity in price but with both a ceiling and a floor. The contract also contained a limitation of liability provision with respect to consequential loss and the like, a force majeure provision and a dispute resolution provision.

As a result of a dramatic increase in gas prices, Total sought to invoke the force majeure provision in the gas supply contract and gave notice, threatening to cease supplying gas under its contract to TVPL. TVPL commenced an action to determine the validity of that notice and to seek a declaration as to its entitlement to damages or specific performance in the event that Total carried through on the notice.

In his decision (2005 Folio 668), Justice Clarke had little difficulty in dispensing with the claim for force majeure. It took somewhat longer to address the argument that the matter should have proceeded through the dispute resolution process specified under the contract rather than directly to the courts. However, the Court held that it had a discretion to stay the court action for alternate dispute resolution. In light of the plain breach, the needless duplication of proceedings that might result and the need for a speedy resolution, it was held that the court proceedings should not be stayed.

The Court went on to address an intriguing argument that the limitation of liability provision would deny TVPL any claim for the difference between the market prices for gas and the prices payable for gas under the contract, as being the sort of consequential loss excluded by the contract. The Court found such an interpretation to be unreasonable, even though the words in the provision might appear to extend to such a claim. If one wanted relief from a core obligation, in this case to supply gas, it was found that "markedly clearer language" would be required. This limitation provision, the Court held, did not relieve Total from liability should it fail to deliver any gas at all.

Lastly, the Court held that this was an appropriate case for specific performance. TVPL had obtained an assured supply of gas from a well regarded supplier at an agreed price for a long term. The Court held that to confine TVPL to damages would deprive it of substantially the whole benefit that the contract was intended to give it. As such, specific performance would be available in addition to a claim for damages. Many may be surprised that specific performance would be required where replacement supplies, albeit costly, could be obtained. The Court did not provide extensive reasoning on this aspect. However absent evidence that long term contracts with similar substantial corporations could be obtained, it does seem reasonable not to expose the innocent party to new risks.