APACHE NORTH SEA LTD V EUROIL EXPLORATION LTD AND ANOTHER

[2020] EWCA Civ 1397, Court of Appeal, Civil Division, Lord Justice Lewison, Lord Justice Peter Jackson and Lady Justice Carr, 30 October 2020

Contracts – Sale agreement – Two agreements – Construction

The appellant ANSL had entered into a so-called farm-out agreement (“FOA”) dated 19 February 2015, subsequently amended, with the first respondent, EEL, for the sale and purchase of minority interests in respect of two UK Continental Shelf seaward production licences and participation in associated joint operating agreements. “Licence P” related to an area described as "Val d'Isere" ("the licence area"). By way of consideration, under clause 2 of the FOA, EEL agreed to pay ANSL (subject to the terms of the FOA and in accordance with the provisions of clause 3.1 of the FOA) a price consisting of a proportion of ANSL's historic incurred survey and licence costs (“back costs”,) and 26.25 per cent of ANSL's total costs other than back costs including for drilling the well in the licence area. The second respondent was EEL’s parent company and guarantor. ANSL had drilled an exploration well in the licence area with a drilling rig leased on a long-term basis at various fixed daily rates. The rates were favourable against the market at times, but were significantly in excess of the market rates prevailing at the time of drilling. At first instance, the judge had decided that ANSL’s recovery of drilling costs was capped under FOA by reference to what they would have been had they been incurred at market rate. ANSL appealed, asserting that the judge’s judgment impermissibly incorporated the joint venture accounting convention found in the multilateral joint operating agreement into the FOA, disregarding the express language of the latter.