What is the interplay between contract and restitution claims where there has been a total failure of consideration?
This is one of ten questions answered in the 6th Edition of our Energy and Natural Resources Case Law Update, which discusses significant English Court decisions relevant to businesses in the ENR sector handed down in the period July 2020 to July 2021. The full Update will be published on Monday, 8 November 2021.
Read on for a summary of BP Oil International Ltd v Vega Petroleum Ltd & Anor and the key takeaways for businesses operating in the ENR sector arising out of the judgment.
Interplay between contractual and restitution claims arising out of oil sale contracts
The High Court’s decision in BP Oil International Ltd v Vega Petroleum Ltd & Anor reinforces the principle that, when interpreting a contractual term, the key test is what reasonable commercial people would understand the meaning of that term to be. The decision also serves as an opportune reminder of the fact that a party who repudiates a contract of sale by refusing to accept goods may nonetheless be able to recover the price paid in unjust enrichment where the goods were not delivered by the time of termination.
Key takeaways
The court upheld an oil company’s claim in unjust enrichment for the return of sums it had paid to purchase crude oil which it never received. The relevant contracts had plainly provided for ‘free on board’ (FOB) delivery of the oil, and there was nothing in the factual matrix which suggested that the oil company had instead paid for the right to lift quantities of oil at an oil tanker loading terminal, but then chosen not to exercise that right. The natural and ordinary meaning of the contractual wording was upheld, and there was no extraneous evidence sufficient to displace it.
Facts
Over the course of a number of years, BP Oil International Ltd (BP) entered into a series of contracts to purchase crude oil from Dover Investments Limited (Dover) and Vega Petroleum Limited (Vega, together with Dover, the Defendants) (the Contracts). From 2010 onwards, the Contracts incorporated BP’s General Terms and Conditions.
The Contracts were fairly consistent in their terms, including a delivery term that provided BP with two options: (i) classic FOB delivery at the Ras Shukheir terminal in Egypt; or (ii) an option to take delivery “free into pipeline”.
Over the course of a roughly two year period, BP paid USD17.24 million to the Defendants under the Contracts for the purchase of 211,837 barrels of crude. However, as time went on, a number of obstacles made it increasingly difficult for BP to arrange to lift the oil itself at the terminal, with the result that no oil was actually delivered into BP’s possession - a fact accepted as common ground at trial. After unproductive attempts at settlement, BP issued a claim for unjust enrichment and the restitution of the USD17.24 million, on the basis of a total failure of consideration.
Court's decision
The main issue before the Court was a question of contractual interpretation: did BP’s payments, as BP argued, entitle it to delivery of the oil such that, if delivery was not made in accordance with an ordinary reading of the FOB provision, it was entitled to the return of its money? Or, as asserted by the Defendants, did the payments only give rise to BP acquiring a right to lift certain quantities of oil if BP elected to do so, meaning the payments were unconditional and BP could not recover the payments if it never chose to lift the given quantity of oil?
The Defendants put forward numerous defences:
- There had not been a total failure of consideration, as BP had received a right to lift the oil, which had a value.
- BP had not validly terminated the Contracts, or had done so in repudiation of them, thereby precluding its unjust enrichment claim.
- BP was estopped by convention from arguing that the oil had not been delivered.
- BP’s claim was time barred due to a clause in the BP General Terms and Conditions.
Cockrill J rejected all the defences put forward and allowed BP’s claim for full restitution of the USD17.24 million.
On the issue of interpretation of the Contracts, the Judge found that they plainly, on the basis of the natural meaning of their terms, provided for FOB delivery. Furthermore, the Judge determined that there was nothing in the factual matrix to cast any sort of doubt as to the meaning of the delivery terms. The Contracts did not exclude a claim in restitution.
With respect to the ‘total failure of consideration’ question, it was argued by the Defendants that BP had received significant benefit, in the form an accrued entitlement to lift certain amounts of oil. However, the Judge was not convinced by this argument and determined that an entitlement to lift was worthless if it could never be realised – it could therefore never represent the contractual consideration of actual delivery on the FOB basis (which is what BP had bargained for in any event).
The Judge did accept the Defendants’ argument that BP had wrongfully terminated the Contracts – by issuing proceedings, BP had committed a repudiatory breach that was accepted by the Defendants. Notwithstanding this point, the Judge rejected the Defendants’ further argument that, as a matter of principle, BP should not be permitted to rely on its own repudiatory breach (in renouncing any interest in lifting oil under the Contracts) as the basis for a claim in restitution for an alleged total failure of consideration (in the form of that lifting having not taken place). Cockrill J pointed to the reasoning in various cases that stated that a party that repudiates a contract of sale by refusing to accept goods may nonetheless recover the price paid in unjust enrichment if at the time of termination the benefit has not been received.
The Judge dismissed the estoppel defence, stating that the evidence did not come close to establishing an estoppel. In addition, the time bar defence was rejected as, under the time bar’s proper construction, the type of claim BP was bringing was not caught since delivery was required before the time limit began to run and delivery was never made.
Comment
This decision demonstrates the fact that restitution can provide a route to recovery where there has been a total failure of consideration under a contract, even in circumstances where the termination of that contract was itself a repudiatory breach. It also highlights the primacy that the English Courts will give to the natural and ordinary meaning of contractual terms; when a contract makes an express statement (in this case, that delivery was to be FOB), it is unlikely that any extraneous evidence will change the position.
The 6th Edition of our Energy and Natural Resources Case Law Update will be published in full on Monday, 8 November 2021.
