Total commitment

It’s widely accepted that in today’s busy world, there are more calls on our time than ever. So all things considered, it’s unlikely that you have devoted much time to wondering how Heathrow Airport’s electricity is generated. Had you done so, you might well have assumed it was plugged into the National Grid – but interestingly, this is not the case.

In fact, 20% of the electricity comes from a combined heat and power facility at Heathrow itself. This plant is run on an outsourced basis by Thames Valley Power Limited which felt, not unreasonably, that in order to operate the facility it needed a gas supply. So in 1995, Thames Valley signed a contract with Total Gas and Power Limited, the fourth largest oil and gas supplier in the world.

The reason behind this detail is that the contract contained both an elaborate pricing formula which effectively capped the amount Total could charge, and a protective stipulation usually known as a force majeure clause. This defined force majeure as an event “…beyond the control of the party concerned resulting in the failure by that party in the fulfilment of any of its obligations under this agreement”.

As we are all aware, the cost of energy has risen sharply recently. It appears that in early 2005, Total reached a point at which the gas was costing it more than the price it could charge under the contract, making the contract economically unviable for the company. Total therefore tried to invoke the force majeure protection and wrote to Thames Valley in July 2005 asserting that it was “unable” to supply gas under the contract and offering instead to supply at market rate, acknowledging that Thames Valley could go elsewhere in the interim.

Bad bargains

This was a fairly ambitious claim. The approach a court takes to a contract is that in order to enforce a promise, you must have paid for it – the courts will not enforce a gift. However, once you have passed this hurdle by making any payment at all, the court simply will not discuss whether or not you have made a good bargain. Equally, once the bargain has been struck, the courts are fairly reluctant to let you off simply because it was a bad bargain. After all, for every appalling bargain struck, there is a clever (or lucky) counterparty making an absolute killing.

The clearest example of this was in 1956 when the Suez Canal was closed and shipping companies moving goods from the Far East to the UK claimed they could no longer perform their contracts. The courts said that the contracts could still be fulfilled, albeit at vastly greater expense, by changing route and sailing around the Cape of Good Hope.

It is because the common law takes such an unforgiving approach to contractual obligations that force majeure clauses were developed. However, very few parties who agree to a force majeure clause intend that they should affect the commercial bargain. After all, if one party does not have to perform simply because its price commitment has become expensive then the other party will have to take that liability either through a loss of supply or an increased price.

Total failed in its claim. The court said that it was not “unable” to supply gas – in fact Total’s own letter had made it clear that, physically, gas could be supplied. The problem was the fact that the contract was now loss making and the clause did not cover this. Total had to continue supplying gas at the contracted price.

There are three lessons to be learned from this. First, if you are in a situation where genuinely exceptional changes in market conditions could affect you (in your view) unfairly, you must make this very clear to the other side and be explicit in the contract – the court will not be keen to take standard, rather vague, wording and apply this rather novel price protection concept to it.

Secondly, if you wish to benefit from a long-term fixed price then look very carefully at the protections the supplier is building in and check that you are not accidentally giving away too much.

Thirdly, this case emphasises that while the verbiage that pads out the front and back of a contract is often ignored as “boilerplate”, every client needs to make sure their lawyer has thought about whether sticking in “the usual boilerplate” is sensible or helpful in their own situation.

Neil Wallis is a solicitor with City law firm Macfarlanes; his direct line is 020 7849 2323.