Background
The pursuer in this action, Glenfiddich Wind Limited ("the pursuer"), leased land to Dorenell Windfarm Limited ("the defender") in November 2015, the purpose of which was to enable the defender to construct and operate a windfarm there. The windfarm has been in operation since March 2019. Despite being able to do so, the defender has not always generated electricity from the windfarm, or not taken full advantage of its generation capacity.
In this action, the pursuer claimed that the defender obtained certain benefits due to this non-generation. The value of these benefits ought to be taken into account when determining sums due to the pursuer under the lease. The pursuer sought declarators for both the sums it alleges were unpaid, and its rights under the lease. The defender submitted that, on a proper construction of the lease, no payment obligations were created as a result of the non-generation benefits it received.
Under the rent clause of the lease, an index-linked minimum annual rent of £6 million was agreed, with provisions also in place for rent payments to be calculated by way of annual gross income generated by the defender in its operation of the windfarm.
Agreements with EDFE
The defender agreed to provide the electricity supplier EDFE with a certain amount of electricity by entering into a Power Purchase Agreement ("PPA"). The defender additionally entered into a Metered Volume Reallocation Notice with EDFE. Energy was credited to EDFE by the Transmission System Operator when the defender reduced its electricity generation. EDFE then made payments to the defender as a result of these energy credits.
The pursuer submitted that this arrangement created a benefit for the defender which ought to be regarded as a "constraint benefit" under the lease, and resultingly should be considered in the gross annual income when calculating the rent due. Constraint benefit is defined under the lease as follows:
"Constraint Benefit means a relief, payment, reduced charge or avoided charge received by the Tenant from the Transmission System Operator in relation to a cessation, reduction or constraint in the export of electricity from the relevant Facility to the Transmission System."
Parties' interpretation of the lease
The pursuer considered that the defender had not accounted for these benefits when calculating rent payable under the lease, and had accordingly underpaid rent for the years 2022, 2023 and 2024. The pursuer submitted that it could not have been the parties' intention to allow the rent payable under the lease to be materially diminished by diverting a valuable asset to EDFE, and this construction of the lease would cause fundamental harm to the parties' objectives.
The defender urged the court principally to adopt a textual analysis of the lease; it having been negotiated by experienced and sophisticated businesspeople and solicitors for both parties. There was no scope to argue that the parties must have intended the lease to capture all income or that it was incorrect for the defender to monetise something not falling within its terms. There was no suggestion by the pursuer that any term fell to be implied into the lease. The defender submitted that the pursuer was simply complaining about a bad bargain. Whilst the pursuer knew the that the defender would be entering into the PPA prior to the lease being entered into, it did not realise the defender would be paid as a result of the PPA and was asking the court to fix its own unilateral error by bringing such revenue within the terms of the lease.
Decision
In his decision, in which he found in favour of the pursuer, Lord Sandison adopted not a textual approach to contractual interpretation, but a contextual approach. He decided that a contract must invariably be construed contextually, and when interpreting a contractual provision the court should have regard to the fundamental objectives that reasonable persons in the parties’ position would have had in mind. In other words, "the substance of the parties’ agreement, construed objectively, should prevail over niceties of wording".
Lord Sandison examined the context of the language used in the lease and found that by the inclusion of constraint benefit as a part of the bundle making up gross income, it was intended to comprehend both the actual generation of electricity but also advantage which might emerge "in relation to a cessation, reduction or constraint in the export of electricity from the windfarm to the transmission system.”
Considering this definition in further detail, Lord Sandison considered that the defender received payment as a result of a constraint decision and questioned whether this situation fell within the definition of constraint benefit for the purpose of the lease. To answer this question, Lord Sandison applied "the continued application of familiar principles of construction", comparing this action to Aberdeen City Council v Stewart Milne Group (2011) in which the UK Supreme Court ruled that notwithstanding the language used, what the parties intended was clear. Lord Sandison agreed that the parties could not sensibly have intended that that benefit should be left out of account in the calculation of the sums due to the pursuer as rent under the lease.
Lord Sandison concluded that it made commercial sense for the constraint benefits to be taken into account when calculating the gross income and therefore rent payable under the lease and did not do undue violence to the language of the lease.
Comment
This is an interesting decision from the Commercial Court and is a shift away from the textual analysis approach preferred in several recent cases in Scotland, following on from Wood v Capita Insurance Services (2017). It highlights the complexity of contractual interpretation, which is highly fact specific. Early legal advice is essential.
Co-authored by Rachel Robertson, Trainee Solicitor
