The background to this dispute was an agreement between BP Exploration Operating Company Limited (BP) and Dolphin Drilling Limited (Dolphin) who entered into a Drilling Rig Charter. The dispute raised the wider issues of construction of a contract and the correct approach to interpretation of the terms of an agreement.
In March 2009, the parties signed an agreement for “the provision and operation of the Byford Dolphin, semi-submersible drilling rig”, whereby Dolphin carried out drilling operations in return for which BP paid the contract price. The agreement incorporated standard industry terms known as LOGIC General Conditions of Contract for Drilling Rigs (Ed. 1 – December 1997), and the following Termination clause [where “the Company” is BP]:
Cl.22.1 The Company shall have the right by giving notice to terminate all or any part of the work or the contract at such time or times as the Company may consider necessary for any or all of the following reasons:
(a) to suit the convenience of the Company;
Subsequent to signing the agreement, but before delivery of the rig into the charter (the Commencement Date), BP sought to terminate the contract and applied to the court, under the Civil Procedure Rules Part 8, for a declaration that it was entitled to do so.
Dolphin, opposing the action, argued that termination before the Commencement Date for its own convenience was a breach of the contract by BP and, further, any such entitlement arose only after the Commencement Date, at which point remuneration of loss of profit would be payable by BP to Dolphin.
The financial implications for both parties of the validity, or otherwise, of the termination were considerable. In his judgement, Mr Justice David Steel referred to the decision of the House of Lords in Chartbrook v Persimmon Homes Ltd [2009] 3 WLR 267 concerning the correct approach to be adopted in construing a contract.
It is clear that, where possible, the court should give effect to the terms of the contract, even in circumstances where to do so appears to confer a particularly harsh outcome on one party. Steel J stressed that difficulties of construction should not lead the Court to re-interpret the contract; rather there should be a reluctance to re-formulate the provisions of the agreement. It is not the case that the Court should be ”limited in the amount of red ink or verbal rearrangement or correction” but the starting point should always be what a reasonable person, having all the available background knowledge to the agreement, would have understood the parties to the contract to have meant. The court should interfere only on those occasions where it is satisfied that something has gone wrong with the language of the contract.
In this application, the court was asked to consider the effect of the provision that BP could terminate ”for it’s own convenience” in the context of the Termination Clause as a whole, and the contract as a whole, and whether, on BP’s interpretation of the agreement the contract gave a result which was “commercially absurd”.
It is important to note that the clause on which BP sought to rely - that it had the right to terminate for its own convenience - is one of 8 sub-clauses in the Termination Clause. Dolphin argued that to allow BP to terminate for its own convenience before the contractual Commencement Date would effectively afford BP a ”call option” and Dolphin contended that there must be an implicit proviso in this entitlement that it could only be exercised after the Commencement Date. However, no declaration was sought on the timing of any of the other termination options. The right to terminate is given for a number of different circumstances, some of which were as likely to occur before the Commencement Date as after. Dolphin conceded that there was no limitation on the right to terminate in these alternative circumstances. Thus, as part of the same sub-clause, introduced by the same wording, Dolphin could not place a different meaning with regard to timing of the termination where the reason given by BP was convenience.
According to Steel J, to apply a limitation on the right to terminate under sub-clause (a) only would require the clause to be construed in two different ways. Limiting the right to terminate to circumstances which necessarily prescribed that the rig had been delivered into the charter had not been the intention of the parties. This was clear since some events giving rise to a termination scenario would only occur before delivery such as failure to provide the rig ready for drilling. Without more, this would effectively require the contract to be interpreted as two separate agreements; one in force from the date of signing (the Effective Date) and one in force as from the Commencement Date. Mr Justice Steel concluded that this made no commercial sense where the Termination Clause provided that BP were entitled to terminate at such time or times as they may consider necessary. The argument was rejected.
That the contract was based on industry standard terms was a factor in BP’s favour and the Court found a number of difficulties in holding that the language of the contract was irrational or unworkable where those terms had been derived, largely word for word, from terms which were drafted and agreed by representatives from all quarters of the industry. In other words, though the result was highly unattractive from Dolphin Drilling’s perspective, it arose from a standard term and, on the facts, it was enforceable.
The judgment emphasised the importance of reading the contract as a whole and the approach the court will follow when, in the event of a dispute, there is a need to (re)interpret the parties intentions. These were established in Chartbrookas:
- The essential question is what would a reasonable person having all the background knowledge which would have been available to the parties have understood.
- To depart from the ordinary meaning of the language used, the court must be satisfied that something must have gone wrong with the language and linguistic mistakes are not readily or easily established in a formal document.
- The mere fact that a contract may appear to be unduly favourable to one of the parties is not a sufficient reason to conclude that there has been a linguistic mistake.
- Where the ordinary meaning of the words makes no commercial sense or appears arbitrary or irrational but can be understood in a rational way, that meaning is to be accepted.
- In essence, it should be clear that something has gone wrong with the language but also clear what a reasonable person would have understood the parties to have meant.
Dolphin had sought to challenge BP’s termination by reference to other provisions of the contract which they said were in conflict with BP’s interpretation of the agreement and, as they alleged, the commercially absurd result if BP’s position was correct. In particular, Dolphin highlighted the circumstances for the payment of remuneration following termination. Dolphin’s entitlement to a termination fee depended on whether termination was effected before or after the Commencement Date, with a potentially larger payment being due to them for loss of profit where the termination came after the Commencement Date. It had been their contention throughout that to allow BP to terminate before the Commencement Date failed to give any meaningful sense to the amendment providing for a termination fee to apply only after the Commencement Date. Steel J however, held that this contention was not made out and that the contract had to be read as a whole; it was not workable to apply alternative definitions to terms according to whether the termination was pre or post Commencement Date.
The Court confirmed BP’s entitlement to terminate the contract before the Commencement Date, rejecting Dolphin’s allegation that such an interpretation of the contract gave rise to commercial absurdity. Steel J concluded that where the intentions of the parties are clear, effect must be given to them, notwithstanding that an apparently harsh consequence may result.
BP Exploration Operating Company Limited v Dolphin Drilling Limited ("The Byford Dolphin") [2009] EWHC 3119 (Comm)
