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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Vitol E & P Ltd v Africa Oil and Gas Corporation [2016] EWHC 1677 (Comm) (07 July 2016) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2016/1677.html Cite as: [2016] EWHC 1677 (Comm)

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		7 July 2016

INTRODUCTION

1. This is the trial of an action between Vitol E & P Limited ("Vitol") and Africa Oil and Gas Corporation ("AOGC") which centres upon the true construction of the phrase "the drilling of the Lideka East Well is not commenced" in Clause 7.1 (B) of a written Sale and Purchase Agreement made between them on 24 January 2013 (" the Agreement"). Both parties are involved in offshore oil and gas exploration.
2. The issue can be stated succinctly. Does "commencement of drilling" here mean the initial turning of the drill bit into the seabed (also known as "spudding"), as Vitol contends or does it refer to a broader concept of the drilling process as a whole which commences with mobilisation of the rig, as AOGC contends? If Vitol is correct, it is entitled to a further sum from AOGC of $7.4m under the Agreement but not so if AOGC's interpretation is correct. That is because the payment turns on when drilling had commenced. At the relevant time (30 June 2013), the rig had been mobilised but spudding had not taken place.

THE EVIDENCE

3. There was only one live witness and that was Mr Christopher Joly, Vitol's Upstream Manager responsible for its West African upstream oil and gas business. He produced one witness statement dated 13 May 2016. For Vitol there was also a witness statement from its solicitor Ms Shedy dated 29 July 2015 in relation to its earlier application for summary judgment. For AOGC there were two witness statements from Mr Pierre Loufoua, its Directeur Général, dated 13 November 2015 (in opposition to the summary judgment application) and 13 May 2016, for this trial.

BACKGROUND

4. It is necessary to explain how all of this came about. The salient facts are not in dispute although there was some argument as to whether some of the evidence supplied by both sides was admissible on the question of construction. In the event that issue was very largely resolved. Where it was not, any recital of facts here is without prejudice to my resolution of this issue below.
5. The company whose shares were sold by Vitol to AOGC under the Agreement was a subsidiary of Vitol called Padina Energy Limited" ("Padina"). It in turn owned a Congolese company called Raffia Oil SARL ("Raffia"). On 18 July 2005 the Republic of Congo issued a Research Permit for the offshore area known as "Marine XI". Such permits lasted for up to 3 consecutive "exploration periods". In order for a second or third exploration period to be granted, the beneficiaries of the permit had to have drilled at least one well in the preceding period - this was known as the "Commitment Well". If they then decided to drill another well in the same exploration period it would become known as a Discretionary Well.
6. The beneficiaries of the relevant Research Permit were the parties to a Production Sharing Contract ("PSC") made with the Republic of Congo on 19 August 2005. Their interests in this contract and its related Joint Operating Agreement made on 27 June 2006 ("JOA") are expressed in percentage shares. As at 2009, the shares were held as follows: Raffia: 18.75%, Lundin Marine SARL ("Lundin"): 18.75%, SOCO Exploration & Production Congo ("SOCO"): 29%, Société Nationale des Pétroles du Congo ("SNPC"): 15%, PetroVietnam Exploration Production Corporation ("PVEP"): 8.5% and AOGC: 10%.
7. The JOA provided for the establishment of a Steering Committee ("the SC") and Management Committee (among other bodies) which decided on the drilling activities to be undertaken in the relevant area within Marine XI in the relevant exploration period. Once the SC had made a recommendation it was usually followed by the Management Committee so in practical terms the important body was the SC. SOCO was (apart from the republic of Congo) were defined collectively as "the Contractor". One of SOCO's obligations was to draft a work programme and budget ("WP&B") for any given year, to be voted on by the Steering Committee.
8. The second exploration period commenced on 1 April 2011 and was due to expire on 30 March 2013. By the end of 2011, a Commitment Well for that period had been drilled and accordingly the parties were then entitled to apply for a third exploration period if they so decided. However, in March 2012 SOCO proposed that the existing WP & B be expanded so as to include the drilling of a further, discretionary, well at the site known as Lideka East. Vitol was opposed to this because it had already formed the view that the Marine XI project was not going to yield significant results. Lundin took the same view but the other parties did not.
9. At an SC meeting on 10 April 2012 a majority voted to include the Well. However, because a mobile rig was not then available it was decided to have a further meeting and vote on 9 June 2012 by which time the rig availability and cost might be clearer.
10. It was open to Vitol simply to leave the PSC either the other parties would buy its shares or the PSC would lapse. Moreover, Vitol would be liable for the cost of budgeted items whether completed or not.
11. In fact at around this time, Vitol was approached by New Age (African Global Energy) Ltd ("New Age") which was interested in acquiring some of Vitol's interests in various exploration programs in Africa, including Marine XI. However, New Age also had no interest in drilling the Well, but rather had an interest in drilling in another area of the Marine XI which extended into the Marine XII block, known as "the Litchendjili structure" where significant quantities of oil had already been discovered. Vitol accordingly sought to have the Well removed from the WP&B at the next meeting. To that end, on 8 June 2012, it sent the following letter to all the other parties (including AOGC) ("the 8 June Letter"):

"Further to the above-referenced work programme and budget revision as proposed by the Operator for partner approval or otherwise at the Marine XI Permit SCM #16, dated April 10t^h 2012, please accept this letter as notification to partners of the official Raffia Oil SARL ("Raffia") response.

Raffia's position is as follows:

1. Following the withdrawal of Lundin from the MXI licence, Raffia is prepared to assume all of the Lundin interest pursuant to the JOA.

2. As part of a wider arrangement, Raffia is currently considering assigning it's interest in MXI to a third party. The third party has identified an attractive prospect on the MXI block which we believe the joint venture partners will regard as a more attractive prospect than Lideka East.

3. Raffia therefore does not support the technical proposal to drill the Lideka East prospect at this time.

4. As soon as it has acquired an interest in the MXI licence, the third party will reveal details of the alternative prospect to the MXI joint venture so that the joint venture may review its plans for the licence.

5. Raffia has approved the existing minimum 2012 WP&B for the licence and continues to support the work programme activity therein i.e. without a firm well.

6. In light of the forgoing end in order to allow time for the planning of the next well, Raffia recommends that the partnership prepares to apply to enter the next period of the licence.

We look forward to receiving the results of the partner vote and to hearing how the Operator now intends to progress matters."

12. Because of confidentiality restrictions in place between Vitol and New Age, Vitol could not reveal the identity of the "third party" at that time.
13. Notwithstanding this, at the meeting on 9 June 2012, the Steering Committee voted to include within its 2012 approved WP&B the drilling of the Well. Following that decision, Lundin transferred all of its shares in the PSC on a pro rata basis to Raffia and SOCO with 7.36% going to Raffia. That brought the latter's interest up to 26.11%.
14. By the end of July 2012 it was increasingly unlikely that the Well could be drilled in 2012 since the rig thought to be available was not now available. It was anticipated, therefore, that it would have to go into the 2013 WP&B.
15. On 25 October 2012 Vitol and New Age entered into an agreement whereby the latter would buy Vitol's shares in Padina and hence its economic interest in the PSC ("the New Age Agreement"). However the other parties to the PSC had pre-emption rights in respect of it and Vitol (through Raffia) was obliged by clause 12.3 of the JOA to notify the other parties of the proposed sale and its terms. The other parties would then have the right to purchase the relevant shares themselves but on the same terms. They had so to indicate within 30 days. On 20 December 2012, AOGC accepted the offer to buy Vitol's interests on the terms already set out in the New Age Agreement. The latter was itself conditional upon there being no exercise of such rights. In the meantime, SOCO proposed that the project to drill the Well should be moved into the 2013 WP&B. The latter document set out all the relevant budget figures. The total costs in relation to the Well under the rubric "2.0-Drilling" were $27.058m. There was a detailed breakdown of those costs (see pages 557-558 of the Bundle). Those costs encompass the entirety of the drilling operation at the Well including the costs to be incurred before as well as after the actual drilling for the purpose of obtaining the relevant test results. That budget was then approved on 26 December 2012. All parties in the PSC had costs liabilities in accordance with their shares. It is common ground that Vitol's share of those costs was approximately $7.2 million.
16. By now, because there was a concern as to whether the Well could be drilled within the remaining part of the second period (i.e. by 31 March 2013) SOCO applied to the Congolese Minister for Hydrocarbons for an extension of time to 30 June 2013. This was granted on 14 January 2013.
17. On 24 January 2013 Vitol and AOGC executed the Agreement on precisely the same terms as the New Age Agreement. The transfer of the shares thereunder was completed on 2 April 2013.
18. On 20 April 2013 SOCO reported that a Falcon 100 rig had become available at short notice. It asked the relevant parties to give their urgent approval to entering into a contract to secure this rig for the purpose of drilling the Well. On 14 May 2013 a letter of award was issued by which SOCO awarded the contract for the drilling rig. On 21 May 2013 the mobilisation of the drilling rig from Rio de Janeiro to Congo commenced. On 22 May 2013 SOCO entered into a contract for the drilling rig pursuant to the letter of award. Article 2.3 of the Special Conditions of this contract provided that the contractor was to mobilise the drilling rig from its current location offshore Brazil. SOCO entered into further contracts for the provision of relevant services in relation to this drilling on 16 and 31 May 2013. The drilling rig arrived one nautical mile from the location of the Well on 3 July 2013. The Well was spudded on 20 July 2013.
19. In fact, spudding would have been earlier had it not been for a delay during the towage of the rig to the location of the Well due to a broken line. In the absence of this, spudding might well have taken place in mid-June.

CLAUSE 7.1 (B) OF THE AGREEMENT

20. It is common ground that in late 2012 the value of Raffia's 26.11% interest in the PSC was about $20m. If the Well went ahead, then AOGC would have to bear its share of the costs ie the $7.2m.
21. The cash consideration payable under the Agreement was $12.6m. This would increase to the extent that Vitol had to pay any cash calls in the period between execution of the Agreement and completion.
22. The balance of consideration payable, described as Deferred Consideration, was payable only in certain circumstances. Clause 7.1 provided as follows:

"The Purchaser shall pay the Seller the Deferred Consideration if one of the following conditions is satisfied:

(A) at any time prior to the date of expiry of the Second Exploration Period… the drilling of the Lideka East Well no longer forms part of an approved work program or budget under the Marine XI Joint Operating Agreement, as either firm or contingent expenditure; or

(B) the drilling of the Lideka East Well is not commenced before the date of expiry of the Second Exploration Period…"

23. The Deferred Consideration was the sum of $7.4m. It is common ground that it approximated to the estimated costs of the Well which New Age, and then AOGC, would have to bear if it went ahead.
24. It is further common ground that the underlying purpose of Clause 7.1, when it first appeared in the New Age Agreement, was to some extent at least, to protect New Age from a situation where it had to pay full value for the shares in Raffia namely $20m and a further sum of around $7.2m by way of its costs contribution for the Well. Under normal circumstances, of course, one would expect a party to the PSC to have to make costs contributions. However, the position here was that both Vitol and New Age considered that the Well was not worth drilling and was unlikely to produce any benefit. Therefore, as they saw it, any costs incurred if, by reason of a majority vote, the Well stayed in the WP & B and was drilled, might be wasted.
25. As can be seen, Clause 7.1 is put in negative terms. Vitol is entitled to the Deferred Consideration if either the Well is removed from the WP&B or drilling thereof is not commenced. Otherwise it is not. But the protection afforded to New Age is limited because it operates only up to the end of the second exploration period (ie 30 June 2013) and not indefinitely.
26. So if the Well is not removed from the WP&B and drilling is commenced before the end of the second exploration period, no Deferred Consideration is ever payable - but on the other hand, AOGC will have the costs liability in respect of it. However, if the Well was not removed from the WP&B, and drilling was not commenced by the end of the second exploration period (so that the Deferred Consideration is payable in any event) but it did commence in the third period, AOGC will still incur a costs liability without any protection. It will, in effect, pay out twice.
27. It follows that when AOGC effectively took over the New Age Agreement on 24 January 2013 there were 5 months remaining for drilling of the Well to commence if it was to avoid paying the Deferred Consideration.

THE ISSUE

28. As against Vitol's contention that "commencement of drilling" here means "spudding", in paragraph 14 of the Defence, AOGC contended that this expression is "not confined to operations beginning with the spudding… Rather, the words refer to a phase of operations including, in addition to the spudding of the well, various activities preparatory to, associated with or consequential upon the spudding. Such activities include, but are not limited to the procurement, mobilisation and demobilisation of machinery and services required in connection with the spudding of the well." So no particular event was identified at that stage. At paragraph 8 of AOGC's Skeleton Argument, however, "drilling" was said to refer to "a phase of operations commencing with the mobilisation of the drilling rig." It will be recalled that this was not the first of the activities preparatory to actual spudding. Accordingly the question now is whether commencement of drilling here means spudding or mobilisation of the rig. The former occurred after 30 June, the latter, before.

THE LAW ON CONSTRUCTION OF CONTRACTS

Generally

29. Numerous cases were cited to me on this topic. In my judgment, it is only necessary to refer in any detail to one of them which is the most recent decision of the Supreme Court in this area, in Arnold v Britton [2015] AC 1619. At paragraphs 15-22of his judgment (with which the other members of the Court agreed, save Lord Carnwath who dissented), Lord Neuberger said:

"15 When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean",…And it does so by focussing on the meaning of the relevant words…in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions…

16 For present purposes, I think it is important to emphasise seven factors.

17 First, the reliance placed in some cases on commercial common sense and surrounding circumstances (eg in Chartbrook [2009] AC 1101, paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.

18 Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve.

19 The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made…

20 Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party.

21 The fifth point concerns the facts known to the parties. When interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or reasonably available to both parties. Given that a contract is a bilateral, or synallagmatic, arrangement involving both parties, it cannot be right, when interpreting a contractual provision, to take into account a fact or circumstance known only to one of the parties."

22 Sixthly, in some cases, an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the language of their contract. In such a case, if it is clear what the parties would have intended, the court will give effect to that intention."

30. Mr Roxburgh referred me to Charter Reinsurance v Fagan [1997] AC 313 at pp391-392 where Lord Hoffmann referred to the fact that "in some cases the notion of words having a natural meaning is not a very helpful one." And later that "the effect of the word therefore depends upon the nature of the distinction which the speaker is wanting to make. This can appear only from the context in which the phrases used. It is artificial to start with an acontextual preconception about the meaning of the words and then see whether that meaning is somehow displaced." Quite so, but as Lord Hoffmann indicated, this may be a danger in some but not all cases. As will appear below, I do not think that there is any real danger of "acontextuality" here and I prefer to be guided by the general significance usually to be attributed to the natural words as emphasised by Lord Neuberger in his paragraphs 15 and 17cited above.
31. I was also referred to Rainy Sky v Kookmin Bank [2011] 1 WLR 2900, in which, at paragraph 21 of his judgment, Lord Clarke stated that if there are 2 possible constructions, the Court is entitled to prefer the construction which is consistent with business common sense and to reject the other. Again, I agree but that does not mean that business common sense should "trump" the natural meaning of an expression-see the caution expressed in this regard by Lord Neuberger in paragraphs 19 and 20 above.
32. I do not consider it necessary to refer to any other authorities in this respect.

The Position as between Vitol and New Age

33. At the outset of the hearing, AOGC objected to certain parts of Mr Joly's witness statement and Vitol objected to certain parts of Mr Loufoua's second witness statement. In both cases it was said that the objectionable parts were inadmissible on the question of interpretation being evidence as to subjective intent or negotiations. By agreement, those matters were dealt with. This left one relatively small amount of evidence which concerned the factual position as Vitol and New Age knew it, or should be taken to have known it. AOGC argued that unless it knew or should have known of such matters as well, they could not be invoked as factual matrix points in relation to the interpretation of the Agreement.
34. The disputed evidence, being what was known as between Vitol and New Age but said not to have been known to AOGC, was of a relatively narrow compass. First, it was that New Age had discovered the site which overlapped Marine XI and XII and that Vitol communicated to New Age that it expected the other parties to approve the Well, that Lundin wished to exit and Raffia would acquire part of its interest which would enable Vitol to sell a larger share to New Age, and receive a higher consideration and that neither Vitol nor New Age wanted to drill the Well; see paragraphs 33 and 34 of Mr Joly's witness statement. Secondly, and derived from paragraphs 43 to 53 of that statement were three facts: (a) Neither Vitol nor New Age wanted the Well drilled at all, (b) they both wanted to try and get it out of the programme and (c) neither could say when the New Age Agreement, when executed, would complete because it depended on ministerial approval. That third point is not actually of any real significance here.
35. I ruled at the trial that such evidence (which AOGC accepted was admissible factual matrix evidence as between Vitol and New Age) was also admissible as between Vitol and AOGC because, while there were different contracting parties, where the contract had to be adopted without any changes at all under a right of pre-emption, the situation should be viewed as if there was an assignment where the new party bore the risk of making all relevant enquiries. I was referred to the speech of Lord Hoffmann in Chartbrook v Persimmon [2009] 1 AC 1101 at paragraph 40:

"The law sometimes deals with the problem by restricting the admissible background to that which would be available not merely to the contracting parties but also to others to whom the document is treated as having been addressed. Thus in Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693, the Court of Appeal decided that in construing the articles of association of the management company of a building divided into flats, background facts which would have been known to all the signatories were inadmissible because the articles should be regarded as addressed to anyone who read the register of companies, including persons who would have known nothing of the facts in question. In Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2004] 1 AC 715 the House of Lords construed words which identified the carrier on the front of a bill of lading without reference to what it said on the back, on the ground that the bankers to whom the bill would be tendered could not be expected to read the small print. Ordinarily, however, a contract is treated as addressed to the parties alone and an assignee must either inquire as to any relevant background or take his chance on how that might affect the meaning a court will give to the document. The law has sometimes to compromise between protecting the interests of the contracting parties and those of third parties. But an extension of the admissible background will, at any rate in theory, increase the risk that a third party will find that the contract does not mean what he thought. How often this is likely to be a practical problem is hard to say…"

36. In my judgment, this is an "ordinary case". In particular and with regard to the relevant background matters here, they are very limited and in fact do not add much to what AOGC unquestionably did know from the 8 June Letter and what could be reasonably inferred from that. It would have been easy for AOGC to ask Vitol, one of its commercial partners in this project, further questions. Indeed there is no actual evidence from AOGC that it did not know or could not reasonably have known of the contested factual matrix evidence.
37. I stated in my ruling that while the evidence was admissible in that respect, either side could renew their admissibility points in closing if they wished. Neither did and in the event, to some extent Mr Roxburgh relied on some of it, for example a desire to try and remove the Well from the programme. Although AOGC had not put any evidence in on the point, it is not clear that it had the same objections to the Well – certainly there is no evidence of it seeking to remove it from the programme. The final point is that in the analysis given below, there is little if anything which relied upon the disputed evidence. I have referred to New Age but it is immaterial whether AOGC was actually aware of New Age's identity or not – it knew what the "third party's" views were from 8 June Letter. And equally whether it knew precisely where the new alternative site was is immaterial (though it would surely be surprising if it did not have a good idea) – the point was the availability of an alternative site within Marine XI and the undesirability of drilling the Well. Accordingly, my ruling is probably academic.

ANALYSIS

Natural Meaning

38. I first consider whether there is a "natural" interpretation of the words "commencement of drilling". I find that there is and it is the physical penetration of the seabed i.e. spudding. This is to be distinguished from preparations for drilling. Drilling is itself not a momentary process and so it is perfectly sensible to speak of when drilling starts, in the spudding sense, and when it stops. That is the sense in which one would define drilling the road or the drilling of one's teeth by a dentist. I further find that "commencement" naturally means the beginning of drilling, not the beginning of preparations for drilling.
39. Some support for this view can be found in Excalibur v Texas Keystone [2013] EWHC 2767. Christopher Clarke J (as he then was), when reciting the history of Garth's oil exploration at a well in Kurdistan said, at paragraph 1285: "on 28 April 2009, Garth announced the spudding (i.e. commencement of drilling) of the first… exploration well".
40. And in Amoco v British American Offshore Limited 16 November 2001, Langley J said as follows:

"65……The Clause also refers to BAO ensuring that all BOP elements are new or like new "at the commencement of drilling operations". That means what it says. Not mobilisation, not commencement of the contract, but commencement of drilling. "Prior to spud of the well" has the same connotation (see paragraph 70). It also accords with all the evidence that the well control equipment must be and is tested prior to drilling, and at no more than fortnightly intervals thereafter.

70 Clause 10 provided for Amoco to provide BAO with a well-drilling programme prior to spudding of the well. "Spudding" is the commencement of drilling."

41. However, AOGC relies on some US cases which it says support its wider interpretation.
42. The first is Terry v Texas (1920) 228 SW 1019. Here, the two oil and gas leases in question would be of no effect unless the lessee "commenced to drill a test well…" within 8 months. By the relevant date the lessee had put timbers to be used to build the derrick along with machinery and a boiler on the ground. Also the well was rigged up (but not spudded) just within the 8 month period. The Texas Court of Civil Appeals held that the work done amounted to commencement. The first case upon which it relied, Fleming v South Penn. Oil Co. 37 W. Va. 645, was actually about whether the beneficiary of the contract in question had "commenced operations for a test well". That, of course, was not the same phrase; "operations" indicates a wider process than simply "drilling". Similarly, in the next case relied upon, McCallister v Texas Co. 223 SW 859, the phrase was "the beginning of operations for the drilling of an oil well". On the back of those two cases and other unidentified cases, the Court held that the appellant there had "commenced to drill". It also rejected a motion to rehear the appeal by reason of another case where what had been done was simply to bring timber onto the land so as to build a derrick on the last day of the lease. Quite apart from the fact that Terry, as with the other US cases, is not binding authority, it can be seen that the result derived from case-law about a different phrase.
43. But Terry was followed by the Supreme Court of Oklahoma in Cromwell v Lewis 1923 OK 1028, where the expression in the lease was "to commence to drill a test well". Here, the Court also said that to "commence" as a dictionary term meant "to perform the first act of" which meant that the preparatory act of placing timber and machinery counted as commencement. I do not agree with that linguistic view either because if correct, it would mean that whatever was required in a preparatory sense i.e. anything which was a necessary prerequisite for drilling, would amount to commencement thereof. As a general proposition, this seems to me to be too broad.
44. Then, Cromwell was itself followed in Smith v Gypsy Oil 1928 OK 10, where the derrick and rig had been built and a water well had been dug to facilitate the drilling. It was then followed again in Ferrell v Russell Creek Okl. 645 P 2d 1003, a yet further decision of the Oklahoma Supreme Court.
45. It can fairly be said that all these decisions proceeds from the original error, as I see it, in Terry.
46. Furthermore, in Caltex Oil v Commissioner of Internal Revenue 12 January 2012, 138 TC 18, the US Federal Tax Court took a different view. Here, in the tax context, a right to make certain deductions in a particular tax year, depended on whether "drilling of the well commences" within 90 days of the end of the tax year. In this case, the site had been prepared but there had been no spudding within that period.
47. The court took the ordinary meaning of drilling as, in effect, spudding and defined "commence" as "begin" and concluded that drilling began when the drill bit penetrated the ground. It has to be noted, though, that this view was held to be consistent with the title of the relevant section in the tax statute which referred to "special rule for spudding of oil and gas wells". The Court distinguished the Oklahoma cases where, for the purpose of a lease preparatory acts were sufficient and said that those cases (most of which as quoted here concerned leases where the term referred to the commencement of "operations for drilling") did not assist in the different contexts of interpreting federal tax law.
48. All in all, I did not find the US cases relied upon by AOGC to be of much assistance.

Clause 7.1 (A)

49. However, AOGC also argues that Vitol's interpretation is incorrect because of the reference to "drilling" in clause 7.1(A). It contends that the reference there to "drilling" being "part of an approved work programme" must mean the whole drilling process the costs of which are set out in the 2013 WP&B. See page 558 of the Bundle. Since that is what "drilling" means in Clause 7.1(A), it must mean the same in Clause 7.1 (B).
50. Vitol responds by saying that this argument cannot work because the "drilling" is said in Clause 7.1(A) only to form "part" of the approved work programme and that would be consistent with seeing "drilling" as simply the physical process commencing with spudding, with the other aspects of the drilling process including the preparations, forming some other parts of the approved work programme. I see that point but in my judgment there is a more fundamental objection to AOGC's argument. This is that the context in Clause 7.1 (A) is simply different. The contingency catered for there is the removal, effectively, of the entire drilling project for the Well because in that case, there is no prospect of New Age (or AOGC), ever having to incur costs in relation to it. So the fact that "drilling" there may be interpreted in a wider sense is irrelevant. Moreover, there is of course no direct comparator because Clause 7.1(A) does not use the expression "commencement of drilling".
51. A related argument was that in any event because the costs of the drilling project for the Well were all set out in the WP & B, it must follow that the commencement of drilling is the first of those operations. But that simply does not follow. The WP & B is a budget and there is no reason why it should govern the expression "the commencement of drilling" used in an entirely different context.

The Underlying Commercial Purpose

52. It is plain from the Agreement and the undisputed factual matrix that the protection offered to New Age and then AOGC in respect of its costs liabilities if the Well was drilled and any obligation to pay the Deferred Consideration to Vitol was time-limited, the reference point being the end of the second exploration period. The parties, objectively, clearly agreed that this protection would not last indefinitely and that there had to be a point at which it could clearly be ascertained whether it was still in place or not. Hence the conditions of the removal of the Well from the WP&B or the commencement of drilling. From a commercial point of view, therefore, it was in AOGC's interests either to secure an early commencement of drilling (in which case the Deferred Consideration was not payable) or alternatively have the Well removed altogether so that while it would have to pay the Deferred Consideration, it did not also have to pay a costs liability for the Well later on.

Unfairness

53. That raises the question of whether in those circumstances the commercial purpose behind Clause 7.1(B) would clearly favour a wider or narrower interpretation of "the commencement" of drilling. If wider, then the scope for the payment obligation to Vitol is somewhat less because it (as here) will be more difficult for Vitol to show that there has been no commencement since, by definition, spudding comes some time after preparation for the drilling. It is first said by AOGC that this wider interpretation must have been intended since the protection conferred upon it was time-limited to begin with and so it would be unfair if AOGC did not have as much protection as possible. However, that does not follow just because the parties have chosen an arbitrary but certain cut-off point for the protection. And anyway, the fact that AOGC may (now) perceive the outcome as unfair is irrelevant where on no sensible view can it be said that Vitol's interpretation produces commercially absurd or unworkable or objectively unreasonable results. After all, even with that interpretation there is still a significant protection for AOGC and it is impossible to read out of Clause 7.1 (B) objectively, a "slant" either way on this ground.

A Liability rationale?

54. However, it is also suggested that if the Clause 7.1 (B) protection for AOGC is to be limited to the second exploration period then that protection should be made available if it is known by then that there will be drilling of the Well. But then (it is said) the narrower interpretation would not work because while spudding might occur after the end of that period, it may nonetheless be known that drilling will occur (as here) by virtue of the extensive preparations already undertaken by 30 June. Moreover, once it is known that drilling will commence (in the sense of spudding), even if only in the third period, it means that New Age/AOGC will not be able to have it removed from the WP & B so as not to have to incur those costs as well as paying out the Deferred Consideration. Conversely, if it is not known in the second period that the Well is to be drilled (even if in the third period), while the Deferred Consideration would have to be paid, there was at least the possibility of removing the Well from the third period if that was what New Age/AOGC wanted.
55. I see all of that but first, this rationale is nowhere made explicit in Clause 7.1. Secondly, if this argument were correct, then commencement would have to be interpreted as (somehow) the incurring of a liability (or perhaps a significant or substantial liability) for drilling the Well, so, as it were, to signal some committed "point of no return". But this is not how AOGC puts its case which is not by reference to the incurring of any liability but the fact of mobilisation.
56. Thirdly it is much more susceptible to uncertainty than commencement by spudding. AOGC seeks to counter this by saying that the Court can simply make some kind of assessment of all the circumstances which have happened before the critical date and then ask itself whether, in substance, "commencement" has occurred and it relies on exercises of this kind being performed in the Oklahoma and Texas cases. I accept that if the provision demands an exercise of this kind (as in Fleming where the condition was "commencement of operations") the Court may have to undertake it but (a) that is not the provision here nor is it how AOGC now puts its case and (b) it does not alter the fact that, objectively, I consider that there is a need for clarity and certainty here where such a substantial payment depends upon it – just as Clause 7.1 (A)'s "event" is certain: either the Well is in the WP & B, or it is out.
57. And the fact that any number of "preparation" events happen to have occurred here so that in one sense it does not matter which one is chosen, is not to the point. The issue might have arisen differently. Thus I posed to Mr Roxburgh for AOGC what the position would have been if the second exploration period had ended on 15 May which is before mobilisation and the actual entry into the contract for the rig though after the award of the rig contract by SOCO. Somewhat surprisingly, Mr Roxburgh did not answer by saying that in this case AOGC would simply have fallen on the wrong side of the line. Rather, he said that this would be more difficult and the only argument would be to push the "commencement" back to one of the pre-15 May events for example the award of the contract. That, to my mind, illustrates the difficulty of AOGC's position. He later suggested that AOGC might have attempted to bring mobilisation forward if the date had been 15 May but of course that was not wholly within its gift, the other parties not having the same imperative.

Drafting Infelicities?

58. Moreover, it cannot be said that "something must have gone wrong" with the drafting here – the narrow interpretation works properly and without objectively unreasonable results.

Contra Proferentem?

59. AOGC submitted that the contra proferentem rule applies here so that the wider interpretation must be adopted. I disagree. First, I do not see the expression in question here as giving rise to real ambiguity (cf the dicta of Lord Mustill in Tam Wing v Band of Credit and Commerce Hong Kong Limited [1996] BCC 388 at 394). Second, I do not regard this as the usual "take it or leave it" case on terms. True it is that AOGC had to contract on the same terms as new Age but it agreed to do this in the underlying agreement between all the commercial parties.

A final point

60. If one had restricted the factual matrix points to those in the actual constructive knowledge of Vitol and AOGC, it is not clear that this would help AOGC. That is because, as noted above, there is no evidence that AOGC wanted to the abandon the Well. Thus any rationale based upon a joint view of both contracting parties that costs incurred on drilling it would be wasted would not work. But if so, any notion of "protection" for AOGC begins to fall away. This is not a determinative point in my view but it does illustrate the real difficulties in AOGC's position, however one looks at it.

Conclusion

61. In my judgment, therefore, one returns to the natural meaning of the words set out in paragraph 38 above. There is no reason not to adopt it and so Clause 7.1 (B) of the Agreement must be construed as Vitol contends, so that for its purposes, drilling did not commence until spudding. Since that did not occur before 30 June 2013, AOGC must pay the Deferred Consideration to Vitol.
62. I am grateful to both Counsel for their most helpful submissions. I will deal with all consequential matters at a hearing to be arranged.