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North Sea Gas Field Shutdown Triggers Damages Claim

Commercial contracts often specify how compensation should be calculated in the event of a breach. However, in one important case involving the shutdown of a North Sea gas field, the High Court has considered whether such terms debar injured parties from also claiming damages.

A utility company had a long-standing contract to purchase natural gas from the field. However, it was shut down for three and a half years so that it could be tied in with another field. The utility company launched proceedings against the owners of the field on the basis that gas had not been delivered as agreed and that it was entitled to damages by way of compensation for the additional cost of making up the shortfall in its gas supply from alternative sources.

The owners argued that the damages claim was excluded by a compensation mechanism in the contract which involved the supply of gas at a reduced price after deliveries resumed following an interruption in service. However, the utility company argued that its common law right to damages was not so limited.

The Court found that the owners’ decision to shut the field had fallen below the standard of conduct specified by the contract. They had not sought to perform their contractual obligations to deliver gas to the utility company, but had taken a deliberate decision not to do so.

The utility company’s claim in respect of under-deliveries of gas was curtailed by the contractual compensation mechanism. However, the Court found that it was entitled to claim damages in respect of the owners’ failure to operate the field in a manner which was consistent with the standard of a reasonable and prudent operator.