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Quicker High Court trials and contract interpretation: $68m oil industry dispute resolved in a day

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24/01/2017

Contractual disputes are inevitable in business and, all too often, litigating to resolve disputes is expensive and time-consuming. As Walker Morris has reported previously, however, the UK courts may have come up with a genuine solution: the Shorter and Flexible Trials schemes.

Under these pilot schemes, which are currently available for parties looking to resolve their commercial disputes in the High Court, key elements of the civil litigation process are shortened, tailored or even dispensed with altogether, in order that trials can be heard, and judgments delivered, more quickly and at less cost than would otherwise be possible.

The recent case of National Bank of Abu Dhabi PJSC v BP Oil International Ltd [1] is the first trial to take place under the Shorter Trials Scheme.  Apart from the legal principles covered, this case is particularly interesting because, although the claim was worth over $68 million, it was fully resolved within just nine months from commencement of the claim and following a trial of just one day.

Legal issues

As with so many commercial disputes – in the oil and gas and myriad other industries, this case centred on the parties’ differing interpretation of contractual provisions. BP had agreed to sell to National Bank of Abu Dhabi (NBAD) a debt that it was owed by an oil refiner.  In the agreement which governed the sale (the Purchase Letter), BP warranted and represented that it was not prohibited from disposing of the debt.  However when the oil refiner defaulted, it came to light that, within the underlying terms and conditions between BP and the oil refiner (the T&Cs), there was a prohibition on assignment without consent.  NBAD sued BP for over $68 million in damages and interest.

Key legal principles reiterated in the case include:

  • Whilst consideration of commercial common sense can, in the right circumstances, be taken into account, it should not undermine the importance of the clear language of a clause. The starting point is the wording of the contract itself.
  • An objective test (that of what the reasonable business person would understand the clause to mean) is applied to ascertain the parties’ intention at the time the contract was entered into.
  • Commercial common sense can be a consideration, but:
    • it cannot be invoked ‘after the fact’. It is only relevant to ascertaining how matters would or could have been perceived when the contract was made;
    • where there are two or more tenable interpretations, the most commercially sensible option will be preferred; and
    • it is not for the court to depart from clear contractual wording even where that represents a bad bargain for any party [2].
  • Contractual limitations or prohibitions on assignment are valid and not contrary to public policy.
  • A limitation/prohibition on assignment applies to both legal and equitable assignments.
  • Where assignment is prohibited unless consent is obtained, an assignment made without consent is void.
  • Assignment in breach of a prohibition is ineffective and does not vest rights in the assignee.

BP argued that the prohibition on assignment didn’t mean that it was in breach of warranty or had misrepresented anything to NBAD, as BP was able to provide means, other than assignment rights, which would put NBAD in the position of being able to recover monies owed. However, finding for NBAD, the High Court held that approach to be strained, bearing in mind fundamental and authoritative contractual interpretation principles and the clear, ordinary meaning of the prohibition on assignment in this case.

Procedural and commercial success

There was no dispute between the parties as to the identification of the relevant contractual provisions in the Purchase Letter and the T&Cs [3], nor as to the fact that BP had not obtained consent to the assignment.  Therefore, despite the substantial sum claimed, this case was simply about the correct interpretation of clauses in only two contractual documents.  The parties agreed that the case could suitably be dealt with under the Shorter Trials Scheme; witness evidence was dispensed with; and there was only very limited documentary disclosure.

The court praised the parties for this cooperative and commercial approach, and the procedure was streamlined, and the trial and judgment were expedited, accordingly. It is estimated that costs incurred by each party amounted to some £350,000 which, in the context of a multi-million dollar dispute, seems proportionate.

WM Comment

The Shorter and Flexible Trial Schemes will not be appropriate for all commercial disputes – particularly those that are factually contentious and/or document-heavy. However this case demonstrates very effectively that the need for voluminous disclosure and evidence, and the need to follow the full procedural rules of traditional civil litigation, does not necessarily correlate with the value of a claim.

For further information, please see our more detailed briefing and please do not hesitate to contact Gwendoline Davies, who will be happy to discuss whether the Shorter or Flexible Trials Schemes might facilitate the swift resolution of your dispute.

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[1] [2016] EWHC 2892 (Comm)
[2] Arnold v Britton [2015] UKSC 36
[3] see the judgment, paras 18 and 8 respectively.

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