Britoil plc v Hunt Overseas Oil Inc
Court of Appeal
Citations: [1994] CLC 561.
Facts
The claimant was a government corporation. They entered into a contract with the defendants. Under the contract, the defendants assigned the claimant their interests in a petroleum production licence for a North Sea oil field. While the parties were negotiating the eventual contract (known as ‘the definitive agreement’), they signed various documents labelled non-binding ‘heads of agreement’.
The definitive agreement specified that the claimant would pay the defendants a share of the oil field’s profits from the ‘pay out date’. The pay out date would only arise if the venture was sufficiently successful. The parties later got into a dispute as to when the pay out date arose. The defendants claimed the pay out date had passed, while the claimant contended that it had not.
This turned on whether the contractual interest was calculated on capital costs and expenses with or without the deduction of net receipts. The claimant argued that no reduction should be made for net receipts. The defendants argued that a deduction should be made. The relevant clause of the contract referred simply to ‘[a]ll capital costs and expenses incurred by [the claimant]’. However, the non-binding ‘heads of agreement’ provided evidence that the parties had intended to deduct net receipts.
Issue(s)
- What was the proper construction of the contract in relation to capital costs?
- Should the contract be rectified to refer to a reduction for net receipts?
Decision
The Court of Appeal held in favour of the claimant. The relevant clause only made reference to capital costs and expenses. It made no allowance for the deduction of net receipts. The majority did not consider there to be sufficient evidence in the heads of agreement that the parties intended the definitive agreement to define interest as calculated net receipts. As such, the conditions for rectification were not met.
This Case is Authority For…
Where the parties have already made an contract which a later document is merely intended to record, the court will construe the earlier contract and give effect to it. The written record of the contract can be rectified to conform with the court’s objective interpretation of the prior contract. The exception is where the new written document was intended to vary the previous contract, in which case the new document takes precedence.
In these cases, the remedy of rectification is analogous to the remedy of specific performance. The parties are entitled to have a written agreement which conforms to the earlier contract.
If, by contrast, there is no earlier contract, a different approach to rectification is necessary. If a party argues that the parties made a mistake in drafting the contract, they must provide cogent proof of what the parties actually intended. This is not a purely objective test – the parties’ subjective intentions are relevant.
Whether rectification involves a subjective or objective approach has been controversial in the case-law. In particular, the majority approach in Britoil was contradicted obiter by Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38. The Court of Appeal in FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019] EWCA 1361 has recently confirmed that the Britoil approach is correct.
Other
Hoffman LJ dissented. He argued that interest should normally be calculated net receipts unless there is clear language to the contrary. As such, the correct interpretation of the relevant clause was that the interest was net receipts, even though it did not explicitly say so. Hoffman LJ also argued that the conditions for rectification were met. He thought that what the parties intended should be assessed objectively.
