CATS out of the bag on unitary interpretation

Tessa Pullen

In Teesside Gas v CATS North Sea, the Court of Appeal  takes us step-by-step through the unitary exercise of contractual interpretation.

This was a dispute about the amount payable by Teesside Gas to CATS for the right to use part of the capacity of a North Sea pipeline. Teesside Gas contracted with CATS to reserve capacity and paid a fixed “Capacity Fee” for the first 20 years of the contract. This was calculated using a formula.

The issue on appeal was the meaning, in the formula, of “CATS Capacity” which was defined as “the aggregate maximum rates of delivery of Non-Capacity Gas notified by the CATS Operators …”. Teesside Gas was entitled to be notified of “the maximum rate of delivery of Non-Capacity Gas at such point during the proposed period of transportation”. The court had to determine whether this figure should by reference to historical maximum rates of delivery for Non-Capacity Gas, or whether the figure should based on up-to-date figures, namely the agreed daily reserve capacity rate.

The Court of Appeal upheld the first instance decision agreeing with CATS that up-to-date figures were required. In doing it so went through the following elements of the “unitary exercise” to interpretation:

  1. The language used: was capable of supporting both party’s interpretation.
  2. Other relevant provisions of the agreement: similar language and relevant defined terms in other clauses throughout the agreement made sense only if up-to-date figures were used.
  3. Structure of payment: if Teesside Gas were right then the greater burden would fall on CATS.
  4. Background circumstances: gas fields deplete over time so usage of the pipeline would also reduce. Pricing based on maximum rates would be a distorted outcome.
  5. Commercial common sense: CATS’ interpretation made more sense – on Teesside Gas’ interpretation, the figure would be in excess of the actual capacity.