Dentons wins challenge to take-or-pay contract

DENTON Hall has claimed victory in the House of Lords for its client Total Gas Marketing in the first successful challenge of a take-or-pay gas contract since the price of gas dropped in late 1994.

Gas purchasers who in the early 1990s signed long-term take-or-pay contracts have found themselves tied to buying gas at a higher price than the current market price. As a result, said Dentons' partner Liz Tout, there has been a strong commercial incentive for purchasers to find ways of challenging the contracts.

She said that until now every legal challenge to these contracts, made for a variety of reasons, had ended in failure.

Last year Herbert Smith acted for United Gas in trying to get it out of a take-or-pay contract with supplier National Power, represented by Dentons.

But last month all five Law Lords found in Total's favour, saying that the company was no longer bound under the terms of its long-term gas purchase contract with Arco and its partners, who were advised by Herbert Smith partners Ted Greeno and Ann Levin.

The Law Lords ruled that Arco and its partners had failed to satisfy one of the pre-conditions of the contract.

The gas suppliers were supposed to have agreed between them how they would divide up the payments from Total before the start of gas delivery to the joint terminal. In court, Arco's counsel Gordon Pollock QC and Richard Jacobs QC had argued that the failure to enter such an agreement had merely suspended Arco's obligations to deliver gas.

But Tout said: “The judgment was a clear affirmation that if a contract says “X' and there are no legal excuses why it cannot be done then the contract must be followed and given full effect.”

Tout added that if there are pre-conditions in a contract “then you'd better take them seriously”.

The House of Lords judgment followed a two-to-one judgment in Total's favour in the Court of Appeal, which had overturned a High Court finding in Arco's favour.

Herbert Smith's Levin pointed out that the Law Lords had expressed regret at having to make the ruling because the courts wanted to uphold commercial contracts.