Reviewing the past year is made much easier for me by our annual publication on legal developments in oil and gas, the latest edition of which came out in September.
Reading it reminded me what an eventful year it has been. We have had cases on the intricacies of cost share under transportation and processing agreements, on the effect of termination on liquidated damages clauses, and on when a guarantee is in fact an on-demand bond, to pick out just a few.
Then we have had the Oil and Gas Authority’s activities during the year, including licensing rounds, the launch of the National Data Repository, updating of the Asset Stewardship Obligations and the Cygnus/Pegasus decision.
Out of the many developments on which we reported in our review, I have space here to focus on just one.
The dangers of working under letters of intent
In this case, the Court of Appeal considered whether a consultant could rely on a limitation of liability while working under a letter of intent. While the case turns on its own facts, it highlights the risks of proceeding with works on such a basis.
“A” was a sub-contractor on two projects and wanted to appoint “B” as its design consultant. The parties began negotiating a framework agreement under which both sets of works could be carried out.
During the course of the projects they exchanged various draft contracts, each capping B’s liability in one form or another.
As often happens, no formal contract was ever agreed, and defects arose on the second project, leading A to claim losses of around £40 million from B.
B argued, however, that the parties had been proceeding under interim terms which included a limitation of liability.
The lower court found that the contract between the parties was a “simple” contract which merely addressed performance and payment, and that none of the terms they had been negotiating were effectively incorporated as there had been no unqualified acceptance.
As such, B’s liability was uncapped. This might have been disastrous for B, but on appeal it succeeded in having this decision overturned.
The Court of Appeal found that on the first project A had instructed B to proceed under a set of “interim” terms pending agreement of the framework agreement, which terms contained a cap on B’s liability.
By its conduct, and subsequent written confirmation, B accepted these terms for the first project. Some months later A issued another letter of instruction to B for the second project on “the terms and conditions we are currently working under with yourselves”. The Court of Appeal disagreed with the lower court’s view that this should be interpreted as “working on”, i.e. under negotiation.
Instead it decided that the natural meaning of the words meant the second project was to be governed by the same terms as the first project. Once again, B was deemed to have accepted these terms by performance of its services, and by subsequent letter.
Despite the outcome of this appeal, the first instance decision should not be ignored. If the facts had been slightly different, B might well have been found to have entered into a simple contract to perform the works without any limit on its liability. This decision emphasises the need for parties to take care when using letters of intent or letters of award.
While they can be useful tools to allow parties to push forward with a project whilst finalising their contract, the following guidance should be borne in mind:
• Keep the scope limited in cost, time and work packages to keep the parties focused on finalising the contract terms;
• Include drafting in both the letter of intent and the contract when agreed that makes it clear that the contract terms supersede those in the letter of intent and that all preceding works and services are deemed to have been carried out under the contract terms;
• Be clear about all of the key terms that are currently agreed to minimise any doubt as to the terms that the parties are working under, especially with respect to liability.
CMS Annual Review of developments in UK Oil & Gas Law available at https://cms.law/en/bgr/publication/annual-review-of-developments-in-english-oil-and-gas-law-2019
Penelope Warne, senior partner, CMS