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England and Wales Court of Appeal (Civil Division) Decisions


You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> North Sea Energy Holdings NV v Petroleum Authority Of Thailand [1998] EWCA Civ 1953 (16 December 1998)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/1998/1953.html
Cite as: [1998] EWCA Civ 1953, [1999] 1 Lloyd's Rep 483, [1999] 1 All ER (Comm) 173

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IN THE SUPREME COURT OF JUDICATURE QBCMF 97/0699/CM3
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION (COMMERCIAL COURT)
(MR JUSTICE THOMAS )

Royal Courts of Justice
Strand
London WC2

Wednesday 16 December 1998
B e f o r e:
LORD JUSTICE ROCH
LORD JUSTICE WARD
LORD JUSTICE WALLER
- - - - - -

NORTH SEA ENERGY HOLDINGS NV
(Formerly Midland & Scottish Holdings NV)
Plaintiff/Appellant

- v -

PETROLEUM AUTHORITY OF THAILAND
Defendant/Respondent
- - - - - -
(Computer Aided Transcript of the Palantype Notes of
Smith Bernal Reporting Limited, 180 Fleet Street,
London EC4A 2HD
Tel: 0171 421 4040
Official Shorthand Writers to the Court)
- - - - - -
MR M PICKERING QC and MR M TSELENTIS and MR C KIMMINS (instructed by Messrs Gouldens) appeared on behalf of the Plaintiff/Appellant.

MR V V VEEDER QC and MR S BERRY (instructed by Messrs Lovell White Durrant) appeared on behalf of the Defendant/Respondent.
- - - - -
JUDGMENT
(Approved by the Court)
- - - - -
©Crown Copyright

Wednesday 16 December 1998

JUDGMENT

LORD JUSTICE WALLER:

Introduction

This is an appeal from the decision of Thomas J given on 25 March 1997 now reported in [1997] 2 L.L.Rep. 418, and page references in this judgment will be to that report. He gave judgment in favour of North Sea Energy Holdings NV (MSH) on the basis that Petroleum Authority of Thailand (PTT) had repudiated a contract for the purchase of oil but awarded nominal damages only. MSH have appealed against the judge’s decision to award them nominal damages only and PTT have put in a respondent’s notice challenging the judge’s finding that there was a repudiation of the contract. PTT have however made clear through their counsel Mr Veeder QC that they were not concerned to argue any point on the respondent’s notice if the appeal against the decision of the judge awarding nominal damages were dismissed. In that context Mr Veeder identified in his written submissions, what he described as a threshold point. That point related to the question whether there should be implied into the contract between MSH and PTT an obligation to supply certain information. That that might be a threshold point was already apparent, at least in substantial degree by virtue of the fact that it was the first point argued by Mr Murray Pickering QC on behalf of MSH. However, although inclined to feel that it was close to being a threshold point, Mr Pickering, quite understandably in the light of the arguments of Mr Tselentis which were to follow, would not concede that the point simpliciter was a threshold point. In the result we heard some further argument by Mr Pickering.


Mr Tselentis then followed and developed points of his own including a submission that even in the absence of an implied term, MSH were entitled to damages assessed on the basis of a loss of a chance. During Mr Veeder’s oral submissions it became clear that the points relating to whether a term should be implied into the contract, when taken together with Mr Tselentis’s argument as to the proper basis on which the court should approach the question of damages in the absence of such an implied term, did provide a threshold issue which would dispose of the appeal if the court was in favour of PTT. At the conclusion of Mr Veeder’s submission on these aspects we informed Mr Pickering and Mr Veeder that we had provisionally formed the view that there was a threshold issue and had provisionally formed the view that PTT were entitled to succeed on that issue. Mr Veeder confirmed that his clients were not concerned to pursue the respondent’s notice or any other points if the court were to be in their favour on the threshold issue. It was thus indicated to the parties that argument should be limited to the threshold issue and Mr Pickering was invited to respond to that issue. Mr Pickering was further asked whether he accepted that there was a threshold issue and ultimately, having had an opportunity to consult with his clients, he accepted that there was.

At the conclusion of the argument, since we were unanimously of the view that the threshold issue must be decided in PTT’s favour, we so announced to the parties thus saving some further days of argument, and this judgment can be limited to the threshold issue.

Background

It is necessary to spell out the background in some detail in order to explain the threshold issue, and to establish why it is a threshold issue.

The facts as found by the judge are not challenged so far as the threshold issue is concerned and I can accordingly summarise the facts from the findings in his judgment.

PTT is a state enterprise wholly owned by the Government of Thailand. Its function is to buy and sell oil and oil products. It owned 49% of Thai Oil Co. (Thai Oil) which had an oil refinery at Bangkok, and PTT had an arrangement with Thai Oil under which Thai Oil would refine 25,000 barrels of Middle Eastern Oil a day for PTT.
MSH was formerly known as Midland and Scottish Holdings NV hence the abbreviation used. It was formed in March 1993 at the instigation of Mr Deaner, chairman of Midland and Scottish Resources Plc (MSR), for the purpose of entering into any agreement that might be negotiated with PTT, arising out of discussions which had taken place between Mr Jewitt, acting for MSR, with PTT. Originally on 13 May 1993 Mr Deaner on behalf of MSH provided to PTT a formal offer to supply 70 million barrels of Emerald Field oil over a five year period (MSR being the operator of the Emerald Oil Field in the North Sea). But that offer was turned down by PTT on the basis of cost and suitability for refining which led to negotiations for the supply of Middle Eastern crude oil. It was these negotiations which led to the conclusion on 23 July 1993 of the contract relevant to this appeal, between MSH and PTT for the supply over a 5 year period at a discount of U.S. 15 cents per barrel from the official price of 70 million barrels of Saudi Arabian crude oil.

Before coming to the detail of the agreement it is important to set it in its factual context. The full detail appears from the judge's judgment at 421, and I merely select the critical points.

From 1988 a Saudi Arabian government controlled company called Saudi Aramco controlled the export and marketing of all Arabian light and heavy crude oil. By 1993 Saudi Aramco had developed a policy of selling only to the major oil companies and end users i.e. (those companies which had refineries or processing agreements, and would therefore receive and refine the crude oil at the designated refinery or facility). Even though Saudi Arabian oil could be purchased from the major oil companies, that was subject to the permission of Saudi Aramco. Since Saudi Aramco controlled the only oil terminals for the shipment of Arabian Crude (at Ras Tanura and Ju'aymah), it was able to enforce its policy to sell to end users only.

In addition to controlling sales to end users Saudi Aramco set its prices by reference to the region of destination of the cargo. The price for an Eastern destination (Asia/Far East) was different from that for Europe. Saudi Aramco would not permit switching, which, if allowed, might have enabled someone simply to make a profit out of the price difference.

It was thus Saudi Aramco's policy to impose destination restrictions on each customer that purchased oil. It made this policy effective by imposing terms that entitled it to see discharge certificates when a vessel returned to Ras Tanura or Ju'aymah, and imposing sanctions on any person who breached the end user or destination restrictions.

The fact that Saudi Aramco had the policy of imposing end user and destination restrictions was known to both MSH and PTT. However, (and this is an important finding), PTT did not know of Saudi Aramco's policy in great detail. PTT simply had a general knowledge that there were imposed end user and destination restrictions; they also believed, as did MSH, that it was possible to obtain relaxations, but did not know how this could be achieved. The fact that the end user and destination restrictions might be imposed was an important factor in the negotiations between PTT and MSH because they both knew that PTT's refining capacity with Thai Oil might not even in relation to the first year’s supply be able to handle the quantity of oil that MSH was to deliver under the proposed contract. The judge put the matter this way:-

". . . the evidence before me establishes that PTT had at the time the agreement was made only a general knowledge that there were end user and destination restrictions; they believed that it was possible to obtain relaxations, but did not know how this was to be achieved. However the fact that Saudi Aramco imposed end user and destination restrictions was an important factor in the negotiations because both PTT and MSH knew that PTT’s refining capacity with Thai Oil might not, even in the first year’s supply, be able to handle the quantity of oil that MSH was to deliver. Thai Oil’s existing capacity contracted to PTT for Middle Eastern crude was then 25,000 barrels a day (with a 10 percent margin either way); the agreement between PTT and MSH in the first year envisaged a supply of 27,500 barrels a day and an increase in each year thereafter. PTT also had a 36 percent shareholding in Bang Chak Refinery, but it was not suitable for refining Arabian crude oil at that time. PTT was also involved in joint ventures for two further refineries but these were not to be on stream until 1996. MSH also was told that PTT did not have any existing refinery facilities outside of Thailand. It was also apparent to both PTT and MSH that, as PTT did not own any refining capacity, any breakdown or unavailability of Thai Oil’s refining capacity would produce a problem for PTT in accepting delivery of the oil if the destination of the cargo was restricted by Saudi Aramco to Thailand. They needed what Mr Jewitt described as a “safety valve”. It was also known to the parties that if Saudi Aramco discovered that a restriction had been broken. It would have serious consequences; it would be unlikely Saudi Aramco would permit further dealings."

To the above should also be added certain findings he made at page 430:-

"Both parties knew that PTT wanted flexibility to cover two principal difficulties - some limitation on refining capacity in Thailand and the apprehension that there might be difficulties if there was a breakdown in refining in the existing refineries. What PTT wanted was confirmation that in such circumstances they could send the crude oil to processing facilities in the Far East or Asia. It was known that PTT had no facilities outside of Thailand and therefore both must have appreciated that if the limited capacity of oil refining by Thai Oil or a breakdown in other Thai facilities meant that PTT could not refine the oil in Thailand, they would, as and when such difficulties arose, have had to obtain processing facilities elsewhere. Those processing facilities would be made by specific contracts with refineries as the necessity arose over the five year period of the agreement. It was not commercially possible to negotiate with any refinery a contract under which that refinery might be required to take an unspecified volume on an unspecified date over a five year period; thus the availability of refining facilities for PTT could only be ascertained as and when the need arose in that five year period."

It was against that background that when the 23 July 1993 contract came to be signed a further document, the side letter on the terms of which this appeal turns, came to be executed.

The Contract and the side letter

The contract of July 23 1993 contained the following express terms:-
1. Definitions

“Load(s)” means a cargo of oil between five hundred thousand (500,000) and two million eight hundred thousand (2,800,000) Barrels or any two or more such cargoes;
“Period” Means each of five successive twelve (12) month periods the first of which commences on the date falling three (3) months after the date of this Agreement and the last of which expires on the date falling sixty-three (63) months after the date of this Agreement.

2. Quantity and Quality

2.1 The quantity of oil to be delivered under this Agreement is seventy million (70,000,000) Barrels, which amount is to be delivered by the Seller to the Buyer as follows . . .
The Seller shall use all reasonable endeavours to make the oil available in accordance with a loading schedule to be agreed between the Buyer and the Seller within sixty (60) days of execution of this Agreement; the schedule shall reflect the principle that deliveries shall be made on a regular basis in Load(s) of similar quantity.

2.3 The oil delivered by the Seller under the terms of this Agreement in each Period shall be “Arabian Light” and “Arabian Heavy” of “Saudi Aramco Grade” in estimated proportions to be mutually agreed between the Buyer and the Seller six (6) weeks before the beginning of each Period and subject to review quarterly.

7.1 In relation to each Load the Buyer and the Seller shall follow the procedures detailed in a nomination, notification, arrival, loading and demurrage procedure in accordance with the general terms and conditions of Aramco.

7.3 In case the procedures detailed in the Seller’s supply agreement do not follow the general terms and conditions of Saudi Aramco the Buyer and the Seller shall discuss and agree accordingly.

The side letter was in the following terms:-

"In consideration of our agreeing to enter into an agreement (“Agreement”) with MSH today for the supply of Oil we confirm our agreement as a condition precedence for effectiveness of Agreement that before the nomination of the first Load MSH will provide to PTT official confirmation from original supplier that the Oil may be supplied without destination restriction to the Buyer in Thailand or Far Eastern/Asian destinations where the Buyer has processing facilities."

Remaining history

It is possible to take the remaining history quite quickly. Strangely, despite the fact that delivery under the contract was meant to commence on 23 October 1993, very little happened. PTT sent a telex to Mr Jewitt at MSR’s office in London on 23 September 1993 in the following terms:-

"We are still waiting for [your] side letter to confirm that PTT will be allowed to receive Arabian crude oil with free destination.
Please inform us [your] situation by return in order that we would plan our crude program in advance."

They received no reply and sent a chasing telex on 1 October and still there was no reply.

MSH were apparently going through some financial difficulties and a change in control, and although there is some doubt about his role by this stage for MSH the only contact with PTT came still through Mr Jewitt with meetings in October 1993 and in January and February 1994. During this stage it seems that PTT were registering their desire to have any crude oil “free destination”. MSH, through a Mr MacLean, had discovered that to obtain Saudi Arabian oil at a discount would be difficult unless a special deal could be found, and that finding Saudi Arabian oil “free destination” was as good as impossible (423-424). What did appear to be a possibility was to obtain and supply Iranian Crude “free destination”.

Only on 25 May 1994 did MSH then write to PTT. The reference in a follow-up letter of 2 June 1994 to “a specification equivalent to Saudi Light and Heavy” demonstrated that what MSH were keenest to offer at this stage, and did offer at the meetings that thereafter took place on 22 and 23 June 1994 in Bangkok, was Iranian crude.

The meetings ended in deadlock. PTT insisted that MSH deliver Saudi Arabian crude and they further asserted that as a condition precedent to any contract MSH were bound to obtain the confirmation envisaged under the side letter from the original supplier but put by PTT in terms of “free destination”. The judge held that it was reasonable for Mr MacLean and Mr McErlain who were acting for MSH to understand PTT to be asking for a confirmation in terms wider than that to which they were entitled under the side letter. They understood that what was being requested was confirmation of being entitled to have oil shipped to any destination within the Eastern price zone.

After the meeting MSH made a further attempt to persuade PTT to take Iranian crude. PTT responded by letter dated 6 July 1994 saying they would not be able to take the Iranian crude. Their letter continued:-

"As the existing contract has been long outstanding, we would highly appreciate it if you could urgently reply to PTT whether or not your company could satisfy all of the conditions precedence in order to execute our contractual agreement."

Only at this stage did MSH receive any firm offer for the supply to it of Saudi Arabian crude to enable it to fulfil the 23 July 1993 contract. Some tentative negotiations had taken place between representatives of MSH and Mr Snaith representing Magrebian Gas and Oil Corporation (Magoil) in April or May 1994, but only in mid-June 1994 was Mr Snaith contacted with a more definite request (judgment 424). On 11 July 1994 MSH received a written offer from Magoil which was clearly tailored to a substantial degree to the contract which MSH had with PTT. It offered the same quantities over a 5 year period. It stated that the 1st year delivery period would commence by September 1994. It further stated that the lifting of the first cargo would be no later than October 30 1994 “otherwise this offer shall become null and void”. Express terms included the following:-

"DESTINATION RESTRICTIONS

Destination restrictions shall apply to each and every lifting and in general terms shall be as follows:

Delivery shall be effected only to the Buyer’s end user’s refineries in Thailand or other Far Eastern/Asian destinations where buyer’s end user has processing facilities.

. . . .

SPECIAL CONDITIONS

This offer is dependent upon the receipt of confirmation from the “buyer’s end user” that the supply contract between the “buyer” and the “buyer’s end user” is valid and will remain in force for the full term of this agreement.

Prior to the nomination of the first lifting, confirmation of restricted destination(s) is to be given by the “seller” (or at the buyer’s option by the seller’s supplier) to the buyer for relay to the buyer’s end user and a copy of the acceptance of such restriction notice by the “buyer’s end user” is to be given to the seller. The destinations where the buyer’s end user has processing facilities are to be specified."

The last sentence is of considerable importance. It sets out a requirement that is not expressed in the side letter as between MSH and PTT, and it reflects the position as it actually existed so far as Saudi Aramco were concerned i.e. that Saudi Aramco would impose destination restrictions, and would only allow delivery to PTT at their refineries in Thailand or other Far Eastern/Asia destinations where PTT had processing facilities provided that the destinations where PTT had processing facilities had been specified. The judge found, and it was common ground on the appeal, that no confirmation as required by the side letter would in fact have been provided by Saudi Aramco or anyone in Saudi Arabia about the destinations to which oil might have been taken without a specific list of actual ports of destination.

After obtaining this offer from Magoil by letter dated 19 July 1994 MSH confirmed that since Iranian crude was not acceptable they were making arrangements to deliver Saudi light and heavy, and continued as follows:-

"In order to enable us to finalise our arrangements for the supply of Saudi light and heavy please advise us as soon as possible on the following matters:-

(1) Your suggested loading schedule for the first Period (see Clause 2.1 of the Contract).

(2) Your preferred split between Saudi light and Saudi heavy for the first Period (see Clause 2.3 of the Contract).

(3) The destinations in Thailand or in the Far East/Asia where you have processing facilities to which you will be requesting the loads in the first Period to be delivered (please refer to the side letter dated 23rd July 1993)."

The correspondence thereafter was summarised by the judge conveniently in the following terms:


"On Aug. 17, 1994, PTT responded. They stated that they insisted upon taking Arabian crude as soon as MSH provided to them: “the official letter from Saudi Aramco allowing PTT for free destinations”. They stated that they would not be able to wait long for MSH to fulfil the agreement and asked for confirmation as to whether or not MSH could provide the letter. MSH had not received that letter when, on Aug. 19, 1994, they wrote a further letter to PTT asking for a reply. This stated that PTT would not be able to resell or freely trade the crude oil which they would supply, as the oil was to be supplied to PTT either in Thailand or other destinations in the Far East/Asia where PTT had processing facilities. They offered a meeting to discuss the matter but asked for a prompt reply.

Nothing then happened until Sept. 22, 1994, as PTT’s letter of Aug. 17, 1994 was sent to MSH’s Curacao office and not to Geneva where Mr MacLean conducted its business; it was not received by MSH in Geneva until Sept. 16. On Sept. 22, 1994, MSH wrote to PTT complaining of PTT’s failure to answer their request made in the letter of July 19 and of PTT’s request for “free destination”. MSH stated that it was their impression that PTT did not intend to perform the agreement. No response was made by PTT to this letter.

On Oct. 11, 1994, MSH wrote a further letter in which they stated that it was clear that PTT had no intention of performing the agreement, both from their failure to nominate a loading schedule and the split between light and heavy crude and the delivery destinations. They stated that, on the contrary, PTT had insisted on a confirmation that the oil was free destination. The letter concluded:

“This letter is formal notice that we hereby accept your repudiation of the contract and will be claiming from you all damages, costs, losses and expenses incurred by us including loss of profit”.

Correspondence followed in which PTT asserted their right to receive official confirmation as provided for in their side letter of July 23, 1993 and, after further correspondence, PTT themselves terminated the contract on the basis that the confirmation had not been provided."

The issues decided by the judge at the trial

It was common ground at the trial that words “condition precedence” in the side letter must be read as “condition precedent”.

First, the judge ruled against PTT on the condition precedent argument. Their argument was that it was a condition precedent to any contractual obligation coming into effect that MSH would provide the confirmation required by the side letter. The judge's ruling was that the agreement took effect initially and the parties were under obligations, but both parties were discharged from further performance if the confirmation was not provided prior to the nomination of the first load.

Second, he ruled that having regard to the dates as originally contemplated by the contract PTT were accordingly under contractual obligations prior to receiving any confirmation as required by the side letter (1) to co-operate in mutually agreeing the split between Arabian heavy and Arabian light for the first period, and (2) to co-operate in the agreement of a loading schedule for the whole period of the contract. He also however held against MSH as to the implied term that they were asserting as being a term of the contract and side letter. They were alleging in their points of claim as follows:-

"It was an implied term of the agreement, such term to be implied from the express provisions of clauses 2.1 and the side letter, in particular, and by law to give business efficacy to the agreement, that the Defendant would nominate the port or ports for the discharge of crude oil supplied under the agreement upon the request of [MSH] to do so when the time arrived for them to agree the loading schedule"

Mr Pickering before us was, I think, inclined to argue that the term he was contending for was not tied to the agreement of the loading schedule, but required, pursuant to PTT's obligation to co-operate, the provision of names of the specified ports a reasonable time before the nomination of the first load so as to enable MSH to obtain the confirmation sought by the side letter. On any view what the judge ruled was that there was no implied term requiring the provision of the specific names of ports of destination prior to MSH being required to provide the confirmation to which PTT were entitled under the side letter.

The third issue that the judge had to decide was whether PTT were in repudiation of the agreement. He found that PTT were making clear that they would not co-operate in agreeing the split or in agreeing a loading schedule prior to receiving the letter of confirmation, and that in the light of his rulings that was repudiatory conduct. He reached that conclusion without regard to PTT's assertion that they were entitled to a confirmation in terms of “free destination”, but held that in so insisting they were making a request for something more than they were entitled and making even plainer their intentions that they were not going to perform the agreement. (432).

The final issue for the judge was damages. MSH's main contention (and its only pleaded case) was that damages should be assessed by reference to the offer from Magoil. That offer they maintained would have enabled MSH to have made a profit of U.S. 95 cents a barrel. An alternative case was advanced in final submissions that if the U.S. 95 cents were not the appropriate measure because such a profit was unusual and not within the contemplation of the parties, a sum should be awarded as a reasonable profit.

PTT's contention was that the oil would never have been delivered under the Magoil offer. That contention they put in alternative ways; they challenged the very existence of any contractual arrangements which would have enabled Magoil to obtain Saudi crude from Saudi Arabia and/or the ability of the parties such as Magoil or Magoil's supplier (asserted at trial to be a Saudi Prince) to perform the contracts. In the alternative they contended that even if a chain of offers or arrangements existed back to a supplier in Saudi Arabia, and even if the oil might otherwise have been made available without specification of the ports of destination for the full five years, (a) the confirmation required by the side letter would not have been obtained and PTT would have terminated the contract and/or (b) the original supplier would not have confirmed supply to Magoil.

PTT further contended that in any event the damages of U.S. 95 cents were too remote being profits pursuant to an “extravagant and unusual” bargain, and resisted the alternative and last minute contention for an alternative measure on the basis that it was not pleaded, not asserted at any stage until final submissions, and without any evidence as to “reasonable profit” to support it.

The judge held that MSH had established that Magoil had entered into an agreement in principle with the Saudi Prince, but found that on the balance of probabilities the Saudi Prince would not have been able to make available the very large quantity of oil over a five year period. He made that finding because of the absence of the special circumstances that he found would have had to exist if a special deal of the type contemplated were to be fulfilled. He held in any event as follows:-

"There is a further reason why that oil could not have been available to deliver between PTT and MSH, if on the evidence I had found that the Saudi Prince could have supplied the oil. It is clear from the evidence of the Magoil witnesses that oil could not, in any event, have been provided to them without PTT specifying in advance the destinations to which they in fact intended to take the oil. I have already held that there was no implied obligation on the part of PTT to provide that information and they would not have done so. Without it, it would follow that the oil could never have been provided to Magoil by the Saudi Prince."

He also concluded that the damages were too remote on the basis that the Magoil offer was an "unusual and extravagant" bargain following the dictum of Viscount Dunedin in Hall Ltd v Pim Junior & Co. Ltd . (1927) 30 L.L.Rep. 159 at 162. He rejected the alternative basis of putting the damages claim on the basis that that it was simply impossible for him to conclude that MSH would have made any reasonable profit, unless they could have made the profit they had contended for by reference to the Magoil offer. In this regard he expressed the view that he could not rely on a further offer canvassed in evidence from Mr Masaud (Mr McErlain in evidence having said that he was not at the time convinced that Mr Masaud could deliver it) (see 424 of judgment), nor a suggestion as to availability mentioned by Mr Suchdev (Mr McErlain having by June 1994 formed the view that it was uncertain that Arabian oil would be available).

Why is there a threshold point?

There was no challenge by Mr Pickering or Mr Tselentis to the finding by the judge that MSH's damages claim had to be based on being able to supply oil from Magoil. It was not pursued on appeal (and this follows both from the skeleton argument paragraph 89, and the oral submissions of both Mr Pickering and Mr Tselentis) that the other vague offers just referred to provided any basis on which a conclusion could be reached that Arabian oil would have been available from any other source. It was common ground that there was no available market for the supply of Arabian crude.

In any event, whatever the immediate source of supply to MSH, the original supplier in Saudi Arabia would have had imposed on it the destination restrictions of Saudi Aramco. According to the Magoil witnesses no oil could have been provided to them, or presumably any supplier seeking to supply back to back with MSH's contract with PTT, without PTT specifying in advance the actual ports of destination. In any event if MSH were to fulfil their obligations to PTT there had to be confirmation in accordance with the terms of the side letter (whatever that letter means). It was thus common ground that no confirmation could have been obtained from the original supplier without PTT specifying in advance the actual ports of destination.

The judge’s finding, which was again unchallenged, was that PTT could not in fact commercially negotiate with any refinery a contract under which that refinery might be required to take an unspecified volume on an unspecified date over a five year period; thus the availability of refining facilities for PTT could only be ascertained as and when the need arose during that five year period. PTT thus either could not, or certainly in their own commercial interests would not, be able or wish to specify at the commencement of the five year period the actual ports of destination at which they would require the loads discharged throughout the five year period.

Only if either MSH could demonstrate that PTT were in breach of contract in failing to specify the ports of destination (by implying a term or on the true construction of the side letter), or if they could successfully argue that even in the absence of contractual obligation, the appropriate question to pose in relation to the assessment of damages was whether there was a chance that PTT would have supplied the details of the ports despite the absence of obligation, and the answer was that there would have been such a chance if they had not otherwise been repudiating the contract, could MSH be entitled to anything other than nominal damages.

The threshold questions therefore are first and foremost was it an implied term or a term on the proper construction of the side letter that PTT were obliged to supply the specific names of the ports of destination with their proposed loading schedule or at least a reasonable time before the first nomination? If not, can MSH still argue that there was a chance that even in the absence of contractual obligation, PTT would in fact have supplied the names of the ports of destination, and have damages assessed by reference to that loss of that chance?

Construction

The most important aspects of the knowledge of both parties at the time the contract and side letter was negotiated were on the unchallenged findings of the judge in summary as follows. Both MSH through Mr Jewitt, and PTT through Mr Surong, were aware that PTT did not have any existing refining facilities outside Thailand. Both knew of the limitation on PTT’s capacity with Thai Oil. Both knew that a breakdown in the facilities in Thailand would also cause PTT a problem having regard to the quantity of oil to be delivered under the contract. Both knew that in the words of Mr Jewitt PTT needed what is termed a “safety valve” i.e. flexibility to obtain processing facilities outside Thailand if the need arose. PTT did not know that Saudi Aramco would need at the commencement of the five year period the details of the actual ports at which facilities had been arranged before providing a confirmation that oil could be discharged in particular areas . They had no reason to think that Saudi Aramco, in accordance with its policy, would not be content to confirm that provided the crude oil supplied would be refined by PTT; it would allow that oil to be discharged anywhere within Asia or the Far East where PTT had by then arranged processing facilities. They had no reason to think that to obtain that confirmation at the commencement of the contract the identity of the actual ports as opposed to the area where the oil was to be refined by PTT would be of importance.

Mr Pickering rightly stressed that just because a party may subjectively desire a result does not mean that as a matter of construction of the contract he will achieve it. But where the court can discern objectively the purpose of a commercial agreement, or as in this case a side letter, it should not start from the position that the language was intended to frustrate that object.

Mr Pickering sought to stress the precise language and apparent present tense used in the side letter. What PTT were seeking (he argued) was confirmation that oil may be supplied to destinations in Thailand or Far Eastern/Asian destinations where the buyer has ( now in the present, he suggested), processing facilities. It was of course necessary for him to so argue because he appreciated that to impose the further obligation to supply the names of the actual ports was much more difficult if not impossible in relation to ports for which arrangements remained to be made in the future particularly over a period of five years.

The alternative construction placed on the letter by Mr Veeder is that the word ‘has’ does no more than qualify or describe the destinations at the time when the oil comes to be supplied under the contract. What (he submitted) was required was confirmation that the oil may (in the future) be supplied to Far Eastern/Asian destinations where the buyer has processing facilities (at the time of supply).

In my view the construction suggested by Mr Veeder is clearly the correct one. What accordingly PTT were entitled to under the side letter was a confirmation in the terms of that letter. That is to say a confirmation that the oil may (i.e. would be permitted to) be supplied without destination restriction to the Buyer in Thailand or (to) Far Eastern/Asian destinations where the buyer has (at the time of supply) processing facilities.

Once it is clear that that is the confirmation to which PTT were entitled, in my view there is in reality no room for an implied term that PTT were bound to supply prior to the first nomination details of the actual ports at which in the future they might arrange processing facilities.

Mr Pickering sought to rely on those authorities such as Kyprianou v Cyprus Textiles [1958] 2 L.L.Rep. 60; the passage in the speech of Lord Blackburn in McKay v Dick [1881] 6 A.C. 251 at p.263; and A.V. Pound & Co Ltd. V M.W.Hardy & Co. Inc. [1956] A.C. 588 particularly the passage in Lord Somerville’s speech at p.611, all concerned with the circumstances in which there may be an obligation on a contracting party to co-operate. For example in Kypryianou an export licence had to be obtained to enable the contract to be performed. It was held that it “clearly was the duty of the buyers to co-operate with the seller . It was their duty to supply the information to enable the export licence which both parties knew would be required to be obtained”.

But the duty to co-operate cannot be imposed on a party so as to compel him to do something which the contract on its true construction relieved him from doing, and cannot be used to compel a party to do something which he is in fact unable to do. Simply because Magoil many months after the contract had been entered into as between MSH and PTT discovered that it was necessary in order to obtain the confirmation required by the side letter to supply the details of the actual ports, and made that a term of their offer to MSH, that cannot impose on PTT an obligation to provide those details under some loose concept of “duty to co-operate”, particularly when the whole purpose of seeking the confirmation was to have the flexibility to choose where and when to arrange their processing facilities.

Mr Pickering also referred us to cases concerned with the implication of terms e.g. Liverpool City Council v Irwin [1977] AC 239 in particular the analysis of Lord Wilberforce at 253 to 254. He submitted that the correct approach to the question whether a term should be implied into the contract and side letter was “necessity” as Lord Wilberforce suggested (at 254F) was appropriate in the circumstances of that case. Mr Pickering suggested that an implied term was necessary because PTT alone were the party who would know the ports of destination; a list of specific named destinations was required to enable MSH to obtain the confirmation required; and Mr Surong was fully aware of Saudi Aramco’s destination restrictions. The difficulty for Mr Pickering’s argument remains whether the question is approached directly by asking whether a term should be implied, or indirectly by asking whether PTT were under a duty to co-operate. The fact is that PTT did not know the ports of destination unless Mr Pickering was right in his construction of the word “has” i.e. that the confirmation was concerned only with facilities arranged at the commencement of the five year contract; the list of actual ports was required by Magoil but PTT did not know that such a list would be required before the confirmation could be obtained; PTT knew generally of Saudi Aramco’s policy, but not of that requirement.

If one concentrates on the facts known to both parties at the time that the side letter was signed, and on what term should be implied as at the date of the contract and side letter, it is clear that an entitlement to the broad confirmation without the details of individual ports was what both parties knew that PTT needed and it is unsurprising that by the wording used in the side letter it is what they obtained.

Finally there is the point which Mr Veeder made with some force. It was known that PTT would not have the details of the individual ports required over the whole period of five years, and it would be strange to imply any term either under the test of necessity, or business efficacy or by reference to the officious bystander or indeed any test at all, that to the knowledge of both sides would place one party in breach immediately. That would be the effect of implying a term that required the provision of the names not only of ports at which facilities had been arranged as at 23 July 1993, but those for which PTT simply could not make commercial arrangements as far ahead as five years.

My conclusion on this aspect accordingly is, in agreement with Thomas J, that PTT were under no contractual obligation to specify either at the time of providing their proposed loading schedule or prior to nomination of the 1st load all the actual ports at which they had or would have processing arrangements during the five year period of the contract.

I now turn to the argument of Mr Tselentis. His argument was addressed both to the situation in which the implied term had been found to exist and to the situation in which it had been found not to exist. In short the argument was that, particularly where assessment of damage depended on the conduct of third parties, the real question was whether the plaintiff had established the loss of a chance, and if he had with the quantification of that chance. But he argued that even where the assessment depended on the conduct of the contract breaker himself (here the conduct of PTT), still the court was concerned to estimate whether there had been a loss of a chance and if so quantification of that chance. Furthermore he argued that in making this calculation the court would not assume a repudiatory attitude in the contract breaker but a desire to bring the contract to fruition, and a desire to operate his business in his own commercial interests. It was in this context he argued that even if the term was not implied, the court would assess the likelihood that PTT would have voluntarily supplied the information as to ports at which they had arranged processing facilities as required by Magoil.

At this stage of his argument Mr Tselentis referred us to certain well known authorities relating to “loss of a chance” e.g. Chaplin v Hicks [1911] 2 K.B. 786 C.A., Davies v Taylor [1974] A.C. 207 and Allied Maples v Simmons & Simmons [1995] 1 WLR 1602. Of most relevance is the analysis of Stuart-Smith LJ in Allied Maples from pages 1609H to 1614E . That analysis was concerned to deal with where the question of causation ended and where quantification of damage began. It was also concerned with the situation in which the plaintiff’s loss depended upon the actions of firstly the plaintiff and then secondly a third party not the defendant, and in particular not a defendant with contractual rights and obligations vis a vis the plaintiff. It thus does not support the view that so far as the action of the contract breaker is concerned the court is simply concerned with the loss of a chance which must be assessed on the basis that the contract breaker would no longer be in repudiatory frame of mind. What the analysis does demonstrate is that where a plaintiff is claiming damages by reference to an action he or she would have taken and by reference to actions that may or may not have been performed by the plaintiff if the breach of contract or duty had not taken place, the onus is on the plaintiff to prove on a balance of probabilities that he would have taken the action alleged, and it is the contingencies by reference to the actions of third parties which fall to be assessed by reference to loss of a chance. This is the point emphasised in McGregor 16th Edition paragraph 381. The analysis also demonstrates that a plaintiff having established on a balance of probabilities that he would have taken the action he asserts he would have taken, must then in relation to the contingencies dependant on the actions of third parties show (and again this must be on the balance of probabilities) that he had a substantial chance rather than a speculative one. In this I respectfully agree with Ward LJ in First Interstate Bank of California v Cohen Arnold [1996] 1 P.N.L.R. 17 at page 27.

During Mr Tselentis’ submissions the court suggested that there were authorities which were inconsistent with Mr Tselentis’ submission that the contract breaker should be assumed to be in non-repudiatory mode when assessing damages by reference to loss of a chance or otherwise. There are many cases which support the principle that in relation to assessing damages for breach of contract, where the defendant has the option of performing a contract in alternative ways, damages for breach by him must be assessed on the assumption that he will perform it in the way most beneficial to himself and not that most beneficial to the plaintiff. In paragraphs 386 - 388 of McGregor 16th Edition, this principle is considered in the context of the loss of a chance approach to damages and many of the cases are there referred to. The principle is exemplified by Lavarack v Woods [1967] 1 QB 278 which was the particular authority to which attention was drawn.

Overnight Mr Tselentis reconsidered the submissions he wished to make and reformulated his argument. He accepted in the light of the authorities that it was going too far to treat the contract breaker as desirous of bringing the contract to fruition. He suggested that the position was as follows:-

1. The general rule was that where there were two alternative ways of performing the contract the assumption would be that the contract breaker would elect the least burdensome;
2. There was no assumption that a contract breaker would subject himself voluntarily to an obligation; but
3. Events extraneous to the strict ambit of the parties contractual obligations including events within the control of the contract breaker fell to be assessed; this applying in particular to matters of commercial discretion in the context of the contract breaker’s business as a whole which may have an impact on the way that the contract would have been performed (this he described as the first qualification to 1. and 2 above); and
4. The option must be one which the contract breaker can lawfully exercise within the four corners of the contract and still be performing (the second qualification).

Mr Tselentis took us to Lavarack v Woods to support his reformulation . In that case the Court of Appeal (Lord Denning M.R. dissenting) held that an employee was not entitled on his claim for wrongful dismissal to recover damages by reference to extra benefits which the contract did not oblige the employer to confer even though the employee might reasonably have expected the employer to confer them if the employment had continued. The facts in brief were that the plaintiff employee was dismissed on 27 July 1964. While employed he had received bonuses under a bonus scheme the beneficiaries of which were ten employees including the plaintiff. Before dismissal the plaintiff had been notified of the bonus for the year ending 31 March 1965 (and this was brought into the calculation of damages). After 31 March 1965 the defendant employers, as they were entitled to do without being in breach of contract to any employee (and as Diplock LJ put it not simply for the purpose of reducing the employee’s claim to damages), cancelled the bonus scheme. The employers then negotiated increases in salary with at least 7 out of the 9 other employees.

Lord Denning would have held that the employee was entitled to damages for loss of future bonuses, or their equivalent. He reasoned that the case was not one where there two ways of performing the contract; there was only one way and damages should be assessed “on the probabilities of the case - on the remuneration which the plaintiff might reasonably be expected to receive- and not on the bare minimum necessary to satisfy the legal right.” (288E)

But Diplock LJ stressed that

"The law is concerned with legal obligations only and the law of contract only with legal obligations created by mutual agreement between contractors - not with the expectations, however reasonable, of one contractor that the other will do something that he has assumed no legal obligation to do. And so if the contract is broken or wrongly repudiated, the first task of the assessor of damages is to estimate as best he can what the plaintiff would have gained in money or money’s worth if the defendant had fulfilled his legal obligations and had done no more.
Where there is an anticipatory breach by wrongful repudiation, this can at best be an estimate, whatever the date of the hearing. It involves assuming that what has not occurred and never will occur has occurred or will occur, i.e. that the defendant has since the breach performed his legal obligations under the contract, and if the estimate is made before the contract would otherwise have come to an end, that he will continue to perform his legal obligations thereunder until the due date of its termination. But the assumption to be made is that the defendant has performed or will perform his legal obligations under his contract with the plaintiff and nothing more. What these legal obligations are and what is their value to the plaintiff may depend upon the occurrence of events extraneous to the contract itself and, where this is so, the probability of their occurrence is relevant to the estimate."

Diplock LJ did however say at 295F the following:-

"The events extraneous to the contract, upon the occurrence of which the legal obligations of the defendant to the plaintiff thereunder are dependent, may include events which are within the control of the defendant: for instance, his continuing to carry on business even though he has not assumed by his contract a direct legal obligation to the plaintiff to do so. Where this is so, one must not assume that he will cut off his nose to spite his face and so control these events as to reduce his legal obligations to the plaintiff by incurring greater loss in other respects. That would not be the mode of performing the contract which is “the least burthensome to the defendant.”"

and at 297C

"In the present case, if the defendants had continued their bonus scheme, it may well be that upon the true construction of this contract of employment the plaintiff would have been entitled to be recompensed for the loss of the bonus to which he would have been likely to be legally entitled under his service agreement until its expiry. But it is unnecessary to decide this. They were under no contractual obligation to him to continue the scheme and in fact it was discontinued. His legal entitlement under the contract on which he sues would thus have been limited after March 31, 1965, to his salary of £40,000 per annum. And there, in my view, is the end of the matter. I know of no principle upon which he can claim as damages for breach of one service agreement compensation for remuneration which might have become due under some imaginary future agreement which the defendants did not make with him but might have done if they wished. If this were right, in every action for damages for wrongful dismissal, the plaintiff would be entitled to recover not only the remuneration he would have received during the currency of his service agreement but also some additional sum for loss of the chance of its being renewed upon its expiry. Q.E.A."

Russell LJ at 298E said:-

"A plaintiff in an action for damages for wrongful dismissal can rely only on the fact that the defendant was obliged to carry out the contract sued upon. His prospects in terms of money or money’s worth resulting from the carrying out of the contract may be conditioned by the estimated impact of external events on the results of the carrying out. But it has never been held that the plaintiff can claim any sum on the ground that the defendant might after the repudiation date have voluntarily subjected himself to an additional contractual obligation in favour of the plaintiff. That is not the law, nor, with respect, do I think it would be in accord with the sense of the matter so to hold: an employer whose attitude to the employee has reached the stage that he is prepared to sack him out of hand is, to say the least, an unlikely source of future generosity, I cannot find any support for the contrary proposition in the additional authorities to which the Master of the Rolls makes reference."

How does the above authority and Mr Tselentis’ reformulation impact on the present case?

Having found that no term falls to be implied and having set out what I conceive to be the proper construction of the side letter, it is only in that context that it is necessary to consider Mr Tselentis’ arguments. The starting point must be to bear in mind the type of loss that the plaintiffs are claiming. They are claiming loss of profits on the basis that if the repudiation had not occurred the contract with PTT would have continued and profits would have been earned by virtue of MSH being able to deliver oil under it. That was dependant on actions of third parties, actions of MSH and actions of PTT. It is a situation thus in which I can accept that the assessment of damages might be approached on the basis of a loss of a chance rather than putting on the plaintiffs the onus of establishing on the balance of probabilities every element including that the third parties would have acted as MSH were asserting. However in a loss of a chance case it is for the plaintiffs MSH to prove on the balance of probabilities that they would have taken the action required by them to produce the deliveries of oil, and that in so far as the production of oil was dependant on the actions of third parties that there was a real or substantial chance that the oil would be produced. In assessing whether the plaintiffs would in fact have been able to do that which they said they could, and in assessing whether the plaintiffs have established a real chance, it is open to the defendants to establish (if they can) that there was no chance or no substantial chance that the third parties would have acted so as to produce the oil, or no way in which the plaintiffs could have carried out the actions they needed to carry out to achieve the production of oil.
MSH needed from PTT details of the ports to be used over the five year period and that was because the third parties would not have delivered any oil without those details.

On the facts as found by the judge, even if one were to assume that PTT would wish to have supplied the information required, they could not have done so. Mr Tselentis’ reformulation even if correct would not support an argument that the court should assume that someone will do something they cannot do. Even on the approach of Lord Denning “on the probabilities of the case”, there was simply no probability at all that the information would have been made available. Thus on the balance of probabilities MSH would not have been able to do that which they were required to, and there was no substantial chance of third parties producing the oil.

Even if it were to be assumed for the sake of argument that PTT could have done something by way of organising facilities in case they should need them, it is certainly not something that they would have wished to do in their own commercial interests. Again the reformulation would not suggest that the court should assume that a contract breaker will do something that he would have difficulty doing or would not wish to do in his own commercial interests. Again, even on Lord Denning’s approach, and even more clearly on the approach of Diplock and Russell LJJ, a contract breaker will not be assumed to act contrary to his own commercial interests. Once again even on this assumption on the balance of probabilities MSH would not have been able to do what was required of them and third parties would not have produced the oil.

In any event I am not persuaded that in the context of this case the suggested first qualification of Mr Tselentis would have any application. This was a one-off contract, and there was nothing in relation to PTT’s business generally by reference to which it might have been said “not to supply the information will be to cut off their nose to spite their face” or even “not to supply the information would have been inconsistent with the way they were conducting their business with others”. It would simply be PTT’s legal obligation with which the court would be concerned, and if PTT were as MSH contend wishing to bring the contract to an end it is unlikely that they would have been a “source of generosity” even if it lay within their power to be generous.

In my view PTT are entitled to say (a) there was no obligation on us to supply details of all destination ports to be used during the five year period prior to MSH producing the confirmation required under the side letter; (b) without those details no confirmation would have been forthcoming as required by the side letter; and thus (c) the agreement as between MSH and PTT would have been ineffective prior to any oil being required to be purchased by PTT.

The arguments presented on behalf of MSH came close to those emphatically rejected in The Mihalis Angelos [1971] 1 QB 164. In that case it was being argued that if there is an anticipatory breach of contract accepted as a repudiation, it was not open to the defendants to argue that if the breach had not occurred the charterparty would in fact have been cancelled in any event by virtue of non-performance by the plaintiffs.

The argument was rejected by Lord Denning at 196 (stressing incidentally “that if the defendant has under the contract an option which would reduce or extinguish the loss, it will be assumed he will exercise it”); by Edmund Davies LJ at 201 to 203; and by Megaw LJ at 208-210. At 210 Megaw LJ put the matter succinctly in this way:-

“If the contractual rights which he has lost were capable by the terms of the contract of being rendered either less valuable or valueless in certain events, and if it can be shown that those events were at the date of acceptance of the repudiation, predestined to happen, then in my view the damages which he can recover are not more than the true value, if any, of the rights which he has lost, having regard to those predestined events.”

At the time of the repudiation found by the judge it was predestined that without the information as to the ports of discharge no confirmation could be obtained from the original supplier. Indeed it was predestined that no oil could be delivered by MSH without the information. It was also predestined at that time that PTT would not supply that information. Only if PTT were in breach of contract for failing so to do could MSH succeed on a claim for damages.

Conclusion

Because the threshold issue must be decided in favour of PTT, even if there was a repudiation of the contract by PTT, the judge was right to award nominal damages and I would dismiss the appeal.

LORD JUSTICE WARD: I agree.

LORD JUSTICE ROCH: I also agree.

Order: Appeal dismissed with costs. Plaintiffs to pay defendant's costs of appeal and respondent's notice, to be taxed if not agreed.


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