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b.p. Exploration Co. (Libya) Ltd.

b.p. Exploration Co. (Libya) Ltd.

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Published by thinkkim
Contract Law Cases
Contract Law Cases

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Categories:Types, Business/Law
Published by: thinkkim on Apr 12, 2013
Copyright:Attribution Non-commercial


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B.P. EXPLORATION CO. (LIBYA) LTD.RESPONDENTSANDHUNT (NO. 2)APPELLANT[HOUSE OF LORDS][1983] 2 AC 352HEARING-DATES: 3, 7, 8, 9, December 1981, 4 February 19824 February 1982CATCHWORDS:Contract - Frustration - Remedy - Agreement to develop oil concession - Concession developed into oil field on stream - Agreement frustrated by Libyan government expropriating parties' interests and excluding them from field - Whether contractual losses recoverable - Principles to be applied in awarding just sum - Whether interest payable on sum awarded - Law Reform (Miscellaneous Provisions) Act1934 (24 & 25 Geo. 5, c. 41), s. 3 - Law Reform (Frustrated Contracts) Act 1943(6 & 7 Geo. 6, c. 40), ss. 1 (2) (3), 2 (3)HEADNOTE:The defendant, who had been granted an oil concession in Libya, entered into a "farm-in" agreement with the plaintiffs, under which the plaintiffs received a half share in the concession and agreed in return to transfer to the defendant certain "farm-in" contributions in cash and in oil, and to undertake the exploration of the concession and, if oil was found, the development of the field and production of oil from it. Under the agreement, the plaintiffs were to provide all necessary finance until the field came on stream; but once the field came on stream, the plaintiffs were to take and receive, inter alia, one-half of all oil produced from the field and "reimbursement oil" in the form of three-eighths of thedefendant's share of the production until the plaintiffs had received in reimbursement 125 per cent. of their farm-in contributions. After the field came on stream, the cost of production and development of the field was to be borne equally by the two parties. The agreement between the parties was contained in two documents, the operating agreement and the letter agreement, and by clause 6 of theletter agreement it was agreed that the defendant should have no personal liability to repay the sums required in the operating agreement.The plaintiffs spent many millions of pounds in exploration and, having found alarge oil field, in its development. The field came on stream in 1967 and, thereafter, substantial quantities of oil were produced from the field until December1971, when the Libyan government expropriated the plaintiffs' interest in the concession. The plaintiffs had by then received about one-third of the reimbursement oil to which they were entitled. The defendant's interest was expropriated in July 1973. Both parties received compensation from the Libyan government but the amount was inadequate.The plaintiffs claimed a declaration that the contract had been frustrated and an award of a just sum under section 1 (3) of the Law Reform (Frustrated Contracts) Act 1943. n1 The
n1 Law Reform (Frustrated Contracts) Act 1943, s. 1 (1) (2) (3): see post, pp. 369E - 370C.S. 2 (3): see post, p. 370C-D.judge held that the contract, which was governed by English law, had been frustrated in December 1971 and, since clause 6 of the letter agreement could not be construed as being intended to apply in the event of frustration, the provisionsof section 2 (3) of the Act did not apply to exclude an award under the Act. Hefurther held that the plaintiffs were entitled to a just sum under section 1 ofthe Act of 1943 for the valuable benefit that the defendant had received as a result of their contractual performance. The judge made an award in dollars in respect of the farm-in cash and oil received by the defendant and in sterling for the services rendered by the plaintiffs. He ordered that interest under section 3(1) of the Law Reform (Miscellaneous Provisions) Act 1934 n2 be paid on the award from June 14, 1974, when the plaintiffs had made it clear that they intendedto claim restitution. The Court of Appeal dismissed an appeal by the defendant.On appeal by the defendant:-Held, dismissing the appeal, (1) that there was nothing in the terms of the contract or in the circumstances surrounding its making to indicate that the partiescontemplated political risks like the expropriation of the concession by the Libyan government, frustrating the contract, or that any provision was included inthe contract to have effect on such risks materialising and accordingly the case did not fall within section 2 (3) of the Act of 1943 (post, pp. 372F - 373A).(2) That the words "any debt or damages" in section 3 (1) of the Act of 1934 covered any sum recoverable from one party to another at common law, in equity or under such a statute as the Act of 1943 and the judge had power to order interestfrom any date after the frustration of the contract (here the date of the expropriation) as in the exercise of his discretion he considered just, a discretionwhich he exercised properly and with which an appellate court should not interfere (post, pp. 373E-F, H - 374A, C-D).Per curiam. There is no general rule that whenever the amount of any debt or damages payable by one party to an action to the other cannot be ascertained untiljudgment is given, the court should never, in the exercise of its discretion, award interest from a date earlier than the date of the judgment (post, p. 374B-C).Decision of the Court of Appeal [1981] 1 W.L.R. 232 affirmed.INTRODUCTION:APPEAL from the Court of Appeal.This was an appeal by the appellant, Nelson Bunker Hunt, by leave of the House of Lords granted on November 6, 1980, from a judgment and order of the Court of Appeal (Lawton, Bridge and Shaw L.JJ.) dated respectively July 16, 1980, and August 8, 1980, whereby the appeal of the appellant and the cross-appeal of the respondents, B.P. Exploration Co. (Libya) Ltd., were dismissed and the judgments dated June 30 and March 16 and 26, 1979, and the order dated March 26, 1979, of Robert Goff J. were affirmed.The action was begun in May 1975 following the nationalisation on December 7, 1971, by the Libyan government of B.P.'s interest in the Sarir oilfield. This nationalisation frustrated an agreement between Hunt and B.P. under which each partywas entitled to a half share in the field. The concession had initially been granted by the Libyan government to Hunt in December 1957 for a period of 50 years. Pursuant to the agreement dated June 24, 1960, Hunt had assigned a 50 per cent
. interest in his concession to B.P. In consideration B.P. had agreed to make down payments in both money and oil and to advance Hunt's share of expenditure onexploration and development until, if oil was discovered in commercial quantities, the field came on stream. In this event B.P. were to be entitled to take as reimbursement three-eighths of Hunt's half share in the oil if, as and when produced. The agreement provided that the down payments and advances (hereinafter called compendiously "the pre-production payments") were not to be recovered in anyother manner than out of this specified part of Hunt's oil. The field came on stream in January 1967. By an amending agreement in June 1967 in return for a concession by Hunt on the price of "put" oil which he had the option to sell to B.P. the total amount of oil which B.P. were permitted to take from Hunt's oil in reimbursement of the pre-production payments was fixed at a maximum of 50,000,000barrels and the rate at which they were to receive it was not to exceed 18,750barrels per day regardless of the daily production. At the time B.P. were nationalised they had received on this basis 33,000,000 barrels of reimbursement oil.The judge awarded B.P. the entire amount of the pre-production payments which they had failed to obtain in reimbursement oil before nationalisation.The facts are stated in the opinion of Lord Brandon of Oakbrook.COUNSEL:Robert Alexander Q.C., Nicholas Lyell Q.C. and Peregrin Simon for the appellant.On the terms of the contract and in the circumstances surrounding its making the appellant should not be ordered to pay the respondents any principal sums under the Law Reform (Frustrated Contracts) Act 1943 and, in any event, should not be ordered to pay interest on those sums.It must be decided whether on the true construction of the contract the appellant had agreed to take the physical risks of failure of the venture and also the political risk of expropriation. This must be decided on the terms of the particular contract as stated in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] A.C. 32, 42-43. All depends on the proper construction of the contract.This is a commercial contract to be construed accordingly. B.P. took almost every risk of premature termination of their commercial adventure. It would be unrealistic to say that the parties excluded the risk of frustration. Clause 6 of theletter argreement is concerned with risks and this differentiates it from contracts which do not provide for the incidence of risk.It is submitted: (1) The Act of 1943 empowers the court to make an award where money has been paid under a frustrated contract (section 1 (2)) or where a benefit other than a payment of money has been received (section 1 (3)) by reason of something done by the other party.(2) Under section 1 (2) the court is, subject to any inconsistent provisions ofthe agreement, obliged to award the amount of any payment, less expenses.(3) Under section 1 (3) the court is entitled, subject to any inconsistent provisions in the agreement, to award a "just" sum. The award has an upper limit of the value of the benefit which the defendant has obtained by the date of the frustration, but this formula requires, not only that the amount of the sum should be fair; it also requires that the making of an award at all must be just betweenthe parties. If the section created a statutory quasi-contractual right to recovery the law would imply a term that payment should be made, but such a term could arise only where it was fair and just to both parties that the plaintiff should recover.(4) The Act expressly contemplated that contractual provisions will continue toapply in the event of frustration and whether or not it occurs (section 2 (3)).

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