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BP EXPLORATION V. HUNT FACTS In December 1957 the Libyan government granted the defendant a concession to explore for, and extract, oil in a specified area in the Libyan desert. In June 1960 the defendant, who did not have the knowledge, equipment or resources to develop the concession himself, entered into a contract with the plaintiff, a major oil company. The contract, known in the oil industry as a farm-in agreement, was contained in two documents, namely a 'letter agreement' and an operating agreement, whereby the defendant agreed to assign to the plaintiff a half share in the oil concession in consideration for which the plaintiff undertook to explore, develop and operate the whole of the concession entirely from its own resources and at its own expense and to make down payments in cash and oil to the defendant as 'farm-in' contributions. Under the agreement, if and when oil was discovered in commercial quantities the operating expenses were thereafter to be shared and (by section 9(e) of the operating agreement) the plaintiff was to be entitled to take and receive as reimbursement for the defendant's share of the development expenses and its farm-in contributions three-eighths of the defendant's half share of the oil produced until the plaintiff had received a quantity equal to 125% in value of its farm-in contributions and half its initial investment in the oil field. Clause 6 of the letter agreement provided that the defendant would not be personally liable to repay the sums advanced to his account in accordance with section 9(e) of the operating agreement and that the plaintiff was to look for reimbursement solely from the defendant's share of the oil. The main risk of failure in the combined venture was therefore to be borne by the plaintiff and not the defendant. The plaintiff spent considerable sums of money in exploration and development of the concession which proved extremely successful in that recoverable oil in commercially worthwhile quantities was found and from July 1967 production increased considerably. However, on 7 December 1971, following a revolution in Libya, the Libyan government expropriated the plaintiff's half share in the concession and on 11 June 1973 it also expropriated the defendant's half share. Both parties received inadequate compensation. The plaintiff brought an action against the defendant alleging that the agreement had been frustrated on 7 December 1971 as a result of the expropriation by the Libyan government of the plaintiff's half share in the concession and claiming, inter alia, such sums as the court considered just under s 1(3) of the Law Reform (Frustrated Contracts) Act 1943 in respect of the benefit obtained by the defendant by reason of the plaintiff's performance of the contract prior to its frustration. HOLDING
ROBERT GOFF LJ General Principles of the 1943 Act The Act is not designed to do certain things. (i) It is not designed to apportion the loss between the parties. There is no general power under either s 1(2) or s 1(3) to make any allowance for expenses incurred by the plaintiff (except, under the proviso to s 1(2), to enable him to enforce pro tanto payment of a sum payable but unpaid before frustration); and expenses incurred by the defendant are only relevant in so far as they go to reduce the net benefit obtained by him and thereby limit any award to the plaintiff. (ii) It is not concerned to put the parties in the position in which they would have been if the contract had been performed. (iii) It is not concerned to restore the parties to the position they were in before the contract was made. Plaintiff may escape from an unprofitable bargain: An award under the Act may have the effect of rescuing the plaintiff from an unprofitable bargain. This may certainly be true under s 1(2), if the plaintiff has paid the price in advance for an expected return which, if furnished, would have proved unprofitable; if the contract is frustrated before any part of that expected return is received, and before any expenditure is incurred by the defendant, the plaintiff is entitled to the return of the price he has paid, irrespective of the consideration he would have recovered had the contract been performed. Consistently with s 1(2), there is nothing in s 1(3) which necessarily limits an award to the contract consideration. But the contract consideration may nevertheless be highly relevant to the assessment of the just sum to be awarded under s 1(3). Section 1(2) of the Act - Benefits in Money It is not necessary that the consideration for the payment should have wholly failed: claims under s 1(2) are not limited to cases of total failure of consideration, and cases of partial failure of consideration can be catered for by a cross-claim by the defendant under s 1(2) or (3) or both. There is no discretion in the court in respect of a claim under s 1(2), except in respect of the allowance for expenses; subject to such an allowance (and, of course, a crossclaim) the plaintiff is entitled to repayment of the money he has paid. The allowance for expenses is probably best rationalised as a statutory recognition of the defence of change of position. True, the expenses need not have been incurred by reason of the plaintiff's payment; but they must have been incurred in, or for the purpose of, the performance of the contract under which the plaintiff's payment has been made, and for that reason it is just that they should be brought into account. No provision is made in the subsection for any increase in the sum recoverable by the plaintiff,
or in the amount of expenses to be allowed to the defendant, to allow for the time value of money. Section 1(3) of the Act - Benefits in Kind General: In contract, where an award is made under s 1(3), the process is more complicated. First, it has to be shown that the defendant has, by reason of something done by the plaintiff in, or for the purpose of, the performance of the contract, obtained a valuable benefit (other than a payment of money) before the time of discharge. That benefit has to be identified, and valued, and such value forms the upper limit of the award. Secondly, the court may award to the plaintiff such sum, not greater than the value of such benefit, as it considers just having regard to all the circumstances of the case, including in particular the matters specified in s 1(3) (a) and(b). In the case of an award under s 1(3) there are, therefore, two distinct stages: the identification and valuation of the benefit, and the award of the just sum. The amount to be awarded is the just sum, unless the defendant's benefit is less, in which event the award will be limited to the amount of that benefit. Value of Services or Value of End Product: In the course of the argument before me, there was much dispute whether, in the case of services, the benefit should be identified as the services themselves, or as the end product of the services. One example canvassed (because it bore some relationship to the facts of the present case) was the example of prospecting for minerals. If minerals are discovered, should the benefit be regarded (as counsel for Mr Hunt contended) simply as the services of prospecting, or (as counsel for BP contended) as the minerals themselves being the end product of the successful exercise? Now, I am satisfied that it was the intention of the legislature, to be derived from s 1(3) as a matter of construction, that the benefit should in an appropriate case be identified as the end product of the services. This appears, in my judgment, not only from the fact that s 1(3) distinguishes between the plaintiff's performance and the defendant's benefit, but also from s 1(3)(b) which clearly relates to the product of the plaintiff's performance. Let me take the example of a building contract. Suppose that a contract for work on a building is frustrated by a fire which destroys the building and which, therefore, also destroys a substantial amount of work already done by the plaintiff. Although it might be thought just to award the plaintiff a sum assessed on a quantum meruit basis, probably a rateable part of the contract price, in respect of the work he has done, the effect of s 1(3)(b) will be to reduce the award to nil, because of the effect, in relation to the defendant's benefit, of the circumstances giving rise to the frustration of the contract. It is quite plain that, in s 1(3)(b), the word 'benefit' is intended to refer, in the example I have given, to the actual improvement to the building, because that is what will be affected
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