The CATS system transports gas from the North Sea to the UK mainland. The pipeline is one of UK’s principal gas supply routes - serving over 30 offshore sites across a 250 mile stretch.
The appeal concerned the correct interpretation of the fees payable by Teesside Gas Transportation Limited (TGTL) for reserving capacity within the pipeline. Under a Capacity Reservation and Transportation Agreement, TGTL was obliged to pay the CATS parties a capacity fee for five years at the end of a 28 year long agreement. The capacity fee was determined by a cost share formula, which was designed so that TGTL would pay its appropriate share of the overall costs of the operation and maintenance of the CATS system.
TGTL disputed its capacity fee liability and withheld sums which amounted to over £40 million. One of the central issues between the parties was the correct contractual construction in the agreement of one element of the capacity fee, CATS Capacity, which broadly set TGTL’s proportionate share of the overall costs pool.
On 7 April 2020, the Court of Appeal dismissed TGTL’s appeal. Lord Justice Males gave the leading judgment and undertook the “unitary exercise” of construction which considered the language and structure of the agreement, together with its wider commercial setting. Having performed this exercise, the Court found that CATS Capacity needed to evolve over time rather than being fixed by historic figures, with Males LJ observing that the CATS Parties’ construction “makes far better commercial sense”.
The Pinsent Masons team was led by Katharine Davies, Partner and Head of Energy Disputes, supported by Daniel Gardiner (Senior Associate) and Amy Paynter (Solicitor). Pinsent Masons acted alongside Tim Lord QC and Richard Eschwege of Brick Court Chambers who represented the CATS parties before the Court of Appeal.
“This is an important decision in the oil and gas sector,” said Katharine Davies, Head of Energy Disputes at Pinsent Masons. “The court's approach to the construction of commercial contracts has been re-stated in a number of well-known cases by the Supreme Court in recent years. The Court of Appeal decision in this case acts as a timely reminder to parties that the correct approach to interpretation is to adopt a unitary exercise and not to isolate words out of the wider context of the agreement.”
It has been one of the first hearings in the Court of Appeal to be conducted remotely since the outbreak of the Covid-19 pandemic. Sir Geoffrey Vos C commented on the flexibility of the arrangements that could be made “to continue to deliver fair, open and transparent justice in a period of national difficulty”.
Daniel Gardiner, a Senior Associate at Pinsent Masons said: “The hearing in this case was heard just one day after the Covid-19 lockdown was announced by the UK government. Arrangements were made quickly. The fact that the hearing could take place demonstrates the flexibility and resilience of the English courts as world leaders for resolving commercial disputes.”