Teesside Gas Transportation Ltd v Cats North Sea Ltd & Ors

Factual and Procedural Background

This appeal concerns the interpretation of a contractual phrase defining "CATS Capacity" in an agreement between the appellant ("TGTL") and the respondents ("the CATS Parties") relating to the use of a North Sea gas pipeline. The pipeline transports gas from an offshore platform to an onshore terminal and is used by TGTL and other third-party shippers under contracts with the CATS Parties.

The dispute arose over the correct figure to be used in the formula calculating the Capacity Fee payable by TGTL for the contract years 2013 to 2018. The contested phrase referred to "the aggregate maximum rates of delivery of Non-Capacity Gas notified by the CATS Operator pursuant to Clause 4.6(a)(vii), subject to any changes notified pursuant to Clause 4.6(b)(i)". The question was whether this figure should be the maximum delivery rate over the entire contract period for each third-party shipper or the Daily Reserved Capacity Rate ("DRCR") representing the firm capacity booked and updated from time to time.

The original agreement, concluded in 1990, entitled TGTL to reserved capacity ("Capacity Reservation") in the pipeline, with payment regimes evolving from a fixed Transportation Fee to a Capacity Fee calculated by formula in the last five years of the contract. The CATS Parties could contract capacity to third-party shippers as "Non-Capacity Gas" and were required to notify TGTL of certain information, including maximum delivery rates under clause 4.6.

In 1998, a multilateral Transportation Allocation Agreement ("TAA") replaced earlier allocation principles for the commingled gas, introducing the concept of "Booked Capacity" and defining "Firm Shipper Capacity" as including DRCRs. Several Transportation & Processing Agreements ("TPAs") with third parties incorporated DRCRs as variable maximum reserved capacities.

The CATS Parties maintained that the Capacity Fee should be calculated using up-to-date DRCR figures, while TGTL argued for using the maximum delivery rates over the entire contract periods. The trial judge ruled in favor of the CATS Parties, and this appeal challenges that decision.

Legal Issues Presented

1. How should the phrase "aggregate maximum rates of delivery of Non-Capacity Gas notified by the CATS Operator pursuant to Clause 4.6(a)(vii), subject to any changes notified pursuant to Clause 4.6(b)(i)" be interpreted for the purpose of calculating the Capacity Fee?
2. Whether the relevant figure for third-party shippers is the maximum delivery rate over the entire contract period or the updated Daily Reserved Capacity Rate ("DRCR") reflecting firm booked capacity.
3. Whether clause 4.6(b) requires a request from TGTL before updates to notified maximum rates can be made.

Arguments of the Parties

Appellant's Arguments

• The phrase "maximum rate of delivery of Non-Capacity Gas during the proposed period of transportation" requires a forward-looking notification of the highest rate expected at any time during the entire contract period.
• The judge undervalued the literal language of clause 4.6(a)(vii) by rejecting that the "maximum rate" means the highest rate at any point during the contract period.
• The judge erred by construing the contract based on a cost-sharing regime tied to current usage rather than the contract language.
• The judge wrongly relied on later Transportation & Processing Agreements (TPAs) and their DRCR concepts, which were not part of the original 1990 Agreement and unknown to TGTL at that time.
• The DRCRs fluctuate and are not the maximum rates for the entire contract period; thus, they cannot replace the maximum rate over the whole period.
• Updates to maximum rates under clause 4.6(b) require a request from TGTL, which was never made, so updates should not be recognized.

Respondents' Arguments

• The contractual language and context show the parties intended the Capacity Fee calculation to be based on current, up-to-date firm booked capacity (DRCR), not historic maximum rates.
• The phrase "subject to any changes notified pursuant to Clause 4.6(b)(i)" contemplates regular updates to the notified maximum rates, inconsistent with a fixed maximum for the entire contract period.
• The CATS Capacity figure was intended to fluctuate and be updated to reflect actual reserved capacity for each Contract Year.
• Other provisions in the Agreement, including allocation principles, emergency capacity reductions, substitution rights, and abandonment provisions, all support the interpretation that "CATS Capacity" refers to current booked capacity.
• Operational and planning purposes require up-to-date information, not historical maximums, consistent with clause 4.6(c).
• Updates were in fact provided via TAA Update Schedules, satisfying clause 4.6(b) requirements without need for a TGTL request.

Table of Precedents Cited

Court's Reasoning and Analysis

The court undertook a comprehensive construction exercise, considering:

• Language of Clause 4.6: The phrase "maximum rate of delivery during the proposed period of transportation" initially suggested a forward-looking maximum rate over the entire contract period. However, the clause also mandated prompt notification and allowed for updates, implying the figure should be current and subject to change.
• Other Provisions of the Agreement: Allocation principles, emergency capacity reductions, substitution rights, and abandonment provisions all relied on "CATS Capacity" as a fluctuating, current figure reflecting actual reserved capacity rather than historic maximum rates.
• Overall Payment Structure: The Capacity Fee only applied in the final five years of the contract, after a long fixed-fee period. The formula's cost-sharing nature suggested that costs should be shared based on up-to-date reserved capacity, consistent with usage patterns as fields depleted.
• Background Circumstances: The parties would have recognized that gas production and pipeline usage decline over time, making a historic maximum rate figure commercially unreasonable for cost sharing in later years.
• Commercial Common Sense: Using historic maximum rates would distort cost allocation, assigning disproportionate costs to the respondents and benefiting TGTL unfairly. The court found the respondents' construction commercially sensible.
• Updates under Clause 4.6(b): The court accepted the trial judge's factual finding that the respondents provided timely updates via TAA Update Schedules, satisfying the clause's requirements and negating the need for TGTL's request.

The court concluded that although the language was not entirely free from difficulty, the overall contractual scheme, commercial context, and factual findings supported the respondents' interpretation that "CATS Capacity" is to be calculated using the up-to-date DRCR figures rather than historic maximum delivery rates.

Holding and Implications

The appeal is dismissed.

The court upheld the trial judge's interpretation that the Capacity Fee payable by TGTL must be calculated using the current, updated Daily Reserved Capacity Rates ("DRCR") for third-party shippers rather than historic maximum delivery rates over the entire contract periods. This decision affirms the contractual construction favoring a cost-sharing regime based on contemporaneous reserved capacity, consistent with the commercial realities of pipeline usage and gas field depletion.

No new precedent was established. The ruling directly affects the calculation of fees between the parties for the relevant contract years and confirms the importance of interpreting contractual terms in light of the whole agreement and commercial context.