03/12/2009 - Commercial Court resolves point of construction on LOGIC terms incorporated in contract for the hire of a mobile drilling rig

LOGIC ("Leading Oil & Gas Industry Competitiveness") publishes a number of standard forms and terms for use in contracts within the oil and gas industry. It is common for those terms to be adopted subject to amendments negotiated by parties in the course of finalising the terms of their particular contract.  The Commercial Court has recently upheld the right of BP Exploration Operating Company ("BP") to terminate a contract with Dolphin Drilling Limited ("Dolphin") for a three year hire of a mobile drilling rig  "to suit the convenience of the COMPANY" without compensation for loss of profits, provided for in clause 22.1 of the LOGIC General Conditions of Contract for Mobile Drilling Rigs (Edition 1 - December 1997).

In March 2009, BP contracted with Dolphin for supply of the Byford Dolphin Semi-Submersible Drilling Rig to be delivered to an offshore location during the first quarter of 2010. The terms of the contract bound the parties from "the Effective Date" in March 2009 but the hire period only began from "the Commencement Date" in early 2010. The LOGIC Conditions do not provide for the payment of any termination fee upon exercise of the right to terminate for convenience, but the parties had agreed certain amendments to those terms which provided for the payment of a substantial fee essentially representing Dolphin's lost profit should the contract be terminated by BP on or after the Commencement Date. Dolphin suggested that as a matter of construction there was no right to terminate for convenience at any time between the Effective Date and the Commencement Date bearing in mind no termination fee would then be payable, and that BP's suggestion to the contrary was commercially absurd.

Mr Justice David Steel rejected Dolphin's invitation so to limit the contract, emphasising that the decision of the House of Lords in Chartbrook v. Persimmon Homes Ltd [2009] 3 WLR 267 confirmed that before a Court could intervene it had to be clear both that something had gone wrong with the language of the contract and that a reasonable person would have understood the parties to have meant something else. While there was no limit to the amount of red ink or verbal which the Court could use, "if on the one hand the words used by the parties are straightforward (albeit giving rise to a harsh outcome in the circumstances that have arisen) and on the other hand it is difficult to reformulate the relevant provision in a manner which avoids that harsh result, the Court will be the more ready to accept that commercial parties, with their competing interests feeding the negotiations, meant exactly what they said."  Mr Justice David Steel further noted that whilst the outcome (in the aftermath of the unexpected financial crisis) might be highly unattractive from Dolphin's perspective, it arose from the incorporation of a standard term that had been adopted by a committee representative of all quarters of the industry and had been in use for over 12 years.

The Judge refused to grant permission to appeal.