Case Updater: Apache North Sea Limited v INEOS FPS Limited

Summary

The Commercial Court has held that a consent giving party cannot pre-condition its consent where that would enhance that party’s contractual benefit. In this case, Apache sought an amendment to the shipment schedule in a transportation and processing agreement with INEOS. The contract provided that consent was not to be unreasonably withheld. INEOS made its consent subject to Apache agreeing to changes to the contract tariff. The Court found that INEOS was not entitled to impose the condition, as it would have the effect of re-writing the parties’ bargain by depriving Apache of its contractual rights. However, it acknowledged that setting conditions to consent could be legitimate in certain circumstances.

Article

In the recent judgement of Apache North Sea Limited v INEOS FPS Limited [2020] EWHC 2081 (Comm), the English Commercial Court has provided guidance on the scope of a party’s ability to withhold its consent under a contract where there is a provision that such consent will not be unreasonably withheld.

INEOS FPS Limited (INEOS) owns and operates the Forties Pipeline System (the FPS), a major hydrocarbons pipeline network in the North Sea. Apache North Sea Limited (Apache) holds an interest in the Forties Field. The dispute concerned a transportation and processing agreement (the TPA) which the parties entered into following the sale by BP in 2003 of its interest in the Forties Field to Apache. The TPA included a shipment schedule setting out production estimates to the end of 2020. The TPA provided that the shipment schedule could be amended with INEOS’ consent, such consent not to be unreasonably withheld.

In June 2019, Apache requested INEOS’ consent to amend the shipment schedule to increase production estimates for the period January 2021 to December 2040. INEOS refused to grant its consent to the increased production estimates unless Apache agreed to revise the tariff payable under the TPA for the transportation and processing of hydrocarbons. The TPA sets out a base tariff that escalates over time, without limit, using a standard formula for transportation and processing agreements. Apache claimed that INEOS was not entitled to impose a condition on its consent to the increase.

The Commercial Court found in Apache’s favour and agreed that INEOS was not entitled to pre-condition its consent to the change in the schedule in this way. The court paid attention to the overall context of the changes proposed under the TPA; Apache was entitled and obliged to tender hydrocarbons for transportation through the FPS for the duration of the TPA, and the terms of the shipment schedule were not limited to the period up to 2020. It found that it would be inconsistent with the terms and scheme of the TPA if INEOS were entitled to make its consent to the amendment of the shipment schedule conditional on Apache agreeing to a new tariff. This would have involved Apache giving up its contractual rights and being forced to agree an amendment of its original bargain under the TPA.

However, the Court recognised that there may be circumstances where a party will be entitled to impose a condition to its consent even though it may gain an additional benefit from the fulfilment of that condition. This might apply, for example, where fulfilment of the condition would address a consent giver’s legitimate concerns about granting its consent in a manner that is “compensatory or mitigatory”. This might include consenting to the assignment of a contract on the proviso that a credit-worthy guarantee is given in respect of a financially weaker counterparty.

Conclusion

This type of consent provision is common in long-term oil and gas contracts. With the production profile in the North Sea declining and new players entering the market looking to monetise marginal assets, these provisions may see increasing scrutiny and further disputes may arise. The takeaway from this decision is that the court will look at the parties’ deal as a whole, and not the consent provision in isolation, to establish the circumstances in which consent may be withheld. The court will not permit a consent-giver to use the requirement to obtain consent to revisit the terms of that deal so as to deprive its counterparty of its agreed contractual benefit.