Termination: Oil & Gas Scenarios Phillip Spencer Ashley
Overview Common law termination repudiatory breach Contractual termination Worked examples Termination for convenience Questions? 2
3 Common law termination
Common law termination - Repudiation Common law remedies Damages; and/or Treat the contract as discharged (acceptance of repudiatory breach) Availability - depends on severity of breach Always for a breach of condition Never for a breach of warranty For a material breach of an intermediate / innominate term 4
Common law termination Material breach What is a condition? Statutory condition (e.g. Sale of Goods Act, sections 13 to 15) Contractual classification - L Schuler AG v Wickman Machine Tool Sales Ltd [1974] A.C. 235 What is a material breach of an intermediate / innominate term? does the occurrence of the event deprive the party of substantially the whole benefit (Hong Kong Fir Shipping v Kawasaki [1962] 2 QB 26) so grave as to go to the root of the contract (Universal Cargo Carriers Corp v Citati [1957] 2 QB 401 5
Scenario 1 Innominate term material breach HCo and OilCo entered into an agreement for a 999 year lease over a harbour, to be constructed by HCo, to service OilCo offshore fields Due to funding difficulties, HCo suspends work Agreement for lease does not contain termination provisions or LDs Delay of around 6 months OilCo alleged that HCo s actions were repudiatory and reserved its position on accepting the breach whilst negotiations take place After a period of unsuccessful negotiations, Oil Co seeks to accept the repudiation and says it will terminate the agreement Unknown to OilCo, HCo had resumed work shortly before OilCo notified it of termination Is OilCo entitled to terminate? 6
Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577 Starting point - consider what benefit the injured party was intended to obtain from performance of the contract Consider the effect of the breach on the injured party How much of the intended benefit under the contract has the injured party already received? What financial loss has the breach caused? Can the injured party be adequately compensated by an award of damages? Is the breach likely to be repeated? Will the guilty party resume compliance with his obligations? Has the breach fundamentally changed the value of future performance of the guilty party's outstanding obligations? 7
Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577 The breach (delay) was not repudiatory as it had caused little, if any, loss. The delay was likely to shorten the 999-year term of the lease by around 6 months court deemed trivial Whether a breach is repudiatory must be judged at time of acceptance of the breach Had timely completion been regarded as critical it could have sought to include an express termination clause to that effect 8
Common law termination Repudiation Options for the innocent party: Accept treat the contract as at an end No particular form this acceptance must take Must be unequivocal acceptance Affirm continue to perform all obligations under the contract, and insist on continued performance Act swiftly - delay runs the risk of affirming the contract If time is needed reserve your position and take no positive action Writ in water - Effect of Force Majeure, frustration or rectification of breach etc prior to acceptance The innocent party may inadvertently affirm 9
Common law termination The doomsday scenario Accepting an apparent repudiatory breach that is not, in fact, repudiatory This would amount to an unjustified termination of a contract, which may amount to a repudiation itself An unjustified repudiation does not always amount to a repudiation 10
11 Contractual termination
Termination Clauses Lewison LJ s three propositions: First - A contract may provide for termination exercisable for nonrepudiatory breach Second A clause that purports to enable a party to terminate for any breach is likely to be limited to repudiatory breach Third Where a contract provides for contractual termination it will not usually preclude termination at common law (Lewison, The Interpretation of Contracts, 6 th Ed, 2015) 12
Contractual termination - Damages and termination sums To avoid the risk of wrongful termination, an innocent party may choose to exercise the contractual right to terminate instead (if available) Convenience Insolvency However, consider the recoverable damages Acceptance of a repudiatory breach entitles the innocent party, under common law, to claim damages for loss of bargain Exercising a contractual termination right may result in a contractual remedy Crucial to calculate the total value of damages claimable / sum due under the contract, by looking at the terms of the contract 13
Scenario 2 Termination Clause: failing the punctual and regular payment of the hire or on any breach of this charter party the owners shall be at liberty to withdraw the vessel from the service of the charterers without prejudice to any claim they (the owners) may otherwise have against the charterers. Market rates rise Vessel owner wish to terminate Inaccurate bill of lading breach of contract Could the vessel owner terminate? 14
Antaios Compania Naviera v Salen Rederierna [1985] A.C. 191 Arbitrators considered any breach meant any repudiatory breach: Breach of a condition Material breach of an innominate term i.e. goes to the heart of the contract English House of Lords (Supreme Court) agreed: if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense Need to carefully consider default termination thresholds in contracts 15
Scenario 3 Termination Clause: 15.1 If the Contractor fails to carry out any obligation under the Contract, the Engineer may by notice require the Contractor to make good the failure and to remedy it within a specified reasonable time. 15.2 The Employer shall be entitled to terminate the Contract if the Contractor: (a) fails to comply with a notice under Sub-Clause 15.1 (b) plainly demonstrates the intention not to continue performance of his obligations under the Contract, In any of these events or circumstances, the Employer may, upon giving 14 days notice to the Contractor, terminate the Contract and expel the Contractor from Site. 2 year project, only 25% complete in 2 ½ years Terminated 16
Obrascon Huarte Lain SA v Attorney General of Gibraltar [2014] EWHC 1028 (TCC) Parties entitled to agree own terms for any breach of contract no matter how minor would be enforced in clear any breach cases hair trigger termination In this case: Warning and remediation system Clause 15.1 more than insignificant or trivial breaches Time for compliance must be reasonable LOGIC contracts - issue a notice of default in advance of terminating for any breach or any default 17
Scenario 4 LOGIC - Termination clause: 30.1 B shall have the right by giving notice to terminate all or any part of the WORK or the CONTRACT at such time or times as B may consider necessary for any or all of the following issues: (a) To suit the convenience of B; or (b) Subject only to Clause 30.2 in the event of any default on the part of the CONTRACTOR 30.2 In the event of a default on the part of the CONTACTOR and before the issue by B of an order of termination of all or any part of the WORK of the CONTRACT, B shall give notice of default to the CONTRACTOR giving the details of such default. If the CONTRACTOR upon receipt of such notice does not immediately commence and thereafter continuously proceed with action satisfactory to B to remedy such default B may issue a notice of termination in accordance with the provisions of Clause 30.1. Meaning of satisfactory to B any limitations on B? 18
Bluewater Energy Services BV v Mercon Steel Structures BV [2014] EWHC 2132 (TCC) Clause 30.2 not an objective standard No post-facto review Bluewater s decision was an exercise of discretion Implied limitation on Bluewater s powers Socimer International Bank Ltd (in liquidation) v Standard Bank London Ltd [2008] EWCA Civ 116 limitation by reference to concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality Benefits to OilCo Difficult to challenge good faith termination Impact on decision making Disclosure termination strategies Privilege 19
Scenario 5 Termination clause: 14.2. In the event of one of the parties (the "DEFAULTING PARTY") being in material breach of any of its obligations hereunder or under the [other agreement] being a breach which is capable of being remedied, and failing to remedy such breach within one hundred and twenty calendar days after receiving written notice of the failure from the other party (the "NON DEFAULTING PARTY") requiring it to be remedied, or being a breach which is incapable of being remedied and which has continued for one hundred and twenty calendar days after written notice of such breach has been given to the DEFAULTING PARTY, then the NON DEFAULTING PARTY shall have the right to terminate this Agreement forthwith by notice in writing to the DEFAULTING PARTY. Upon termination TERMINATION SUM became due TERMINATION SUM acceleration of future payments Non-payment of three invoices - Material breach? Complete code? 20
Dalkia Utilities Services plc v Celtech International Limited [2006] EWHC 63 (Comm) Common ground material breach did not mean repudiatory breach Would add nothing to common law remedies But disagreement about what it did mean Many authorities refer to non-trivial or minimal breaches Must have regard to the contractual consequences of material breach Failure to pay an invoice was total failure in respect of that invoice Not a complete code common law termination possibility But a notice expressly operating contractual determination will not usually amount to acceptance of repudiatory breach Notice referenced clause If not reference may be different 21
Contract v common law right of termination 22
Scenario 6 OilCo entered into three contracts (similar in all material respects) with FabriCo for the construction of three vessels to be delivered on different dates Contract provided for liquidated damages for delay in delivery FabriCo was unable to deliver the vessels, so OilCo terminated all three contracts and claimed liquidated damages under the contract OilCo and FabriCo agreed the contracts were terminated, but they disagreed as to the appropriate damages claimable OilCo claimed it was entitled to damages for the loss of bargain due to FabriCo s repudiation of the contracts under common law as well as the liquidated damages FabriCo argued OilCo was only entitled to the compensation provided for under the contract, as it had terminated the contracts pursuant to the termination provisions under the contracts. 23
Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75 The existence of a contractual right to terminate the contract does not of itself deprive the contracting parties of the right to terminate under common law. It was wrong to treat the contractual right to terminate as different in substance to the common law right to treat the contract as discharged by repudiation. The fact that that Stocznia s s claim was based on an express term of the contract did not amount to an election to claim solely under the contract, and accordingly Stocznia was not deprived of the ability to claim damages under the common law 24
Scenario 7: Notice OilCo and Buyer entered into a Master Supply Agreement Agreement provided: Either party may terminate this Agreement immediately upon: failure of the other party to observe any of the terms herein and to remedy the same where it is capable of being remedied within the period specified in the notice given by the aggrieved party to the party in default, calling for remedy, being a period not less than twenty (20) days; Also: Termination will not prejudice the rights of action or remedy [of the parties] in respect of any antecedent breach by the other party of any of such party s obligations under this Agreement Buyer sought to terminate and relied on: contractual right AND common law OilCo argued invalid, even at common law, as terminated before notice expired 25
Vinergy International (PVT) Ltd v Richmond Mercantile Limited FZC [2016] EWHC 525 (Comm) Arbitral tribunal: Repudiatory breach Therefore, Clause on termination of limited relevance High Court Termination clause not dependant on repudiatory breach Nothing in termination clause that deals with repudiatory breach No reason to imply a term that a repudiatory breach must follow the process in the termination clause: No express mention in the clause of repudiatory breach The termination clause also deals with a variety of other termination events (e.g. insolvency) Therefore can be inferred that termination clause only deals with events therein 26
Scenario 9: Election X and Y entered into a contract to participate in petroleum exploration and exploitation activities under a concession. Material clauses: 3.1.8 Y is to assign half of the concession to X by the Closing Date, failing which X can terminate the contract. This clause also provides set of obligations and liabilities of the parties following such a termination 3.1.9 If the failure to assign by the Closing Date was due to Z, X is entitled to the return of all payments made under the contract Y committed certain acts of repudiatory breach, and also failed to assign by the Closing Date X therefore had the right to accept the contract had come to an end through Y s repudiatory breach, and also to terminate under a specific clause of the contract X, in the mistaken belief that the contractual terms allowed it to reclaim certain monies paid to Y, decided to rely on the termination clause in the contract. Upon learning of its mistake, X argued that its notice of termination to Y should also be capable of constituting an acceptance of Y s repudiatory breach, thus entitling it to claim common law damages 27
Shell Egypt West Manzala GmbH v Dana Oil Egypt Ltd [2010] EWHC 465 A notice of contractual termination cannot serve as a valid acceptance of a repudiatory breach if the contract and the common law provide alternative rights which have different consequences. Where there is such a difference, the party must elect between the two forms of termination This is where the distinction can be made between this case and Scenario A. In the Gearbulk case, the right to terminate under the contract corresponded to the right under common law, so no election was necessary I can see no reason why Shell could not have served a notice which accepted the repudiatory breach as terminating the contract but, in the alternative, in case they were wrong in asserting that Centurion were in repudiatory breach, exercised the contractual right to terminate afforded by Clause 3.1.8 Mr Justice Tomlinson. Clear indication from Tomlinson J that parties should cover their bases when drafting their termination notices 28
29 Termination for convenience
Scenario 10: Termination for Convenience LOGIC - Clause 24.1(a) to suit the convenience of the COMPANY Scenario: A (owner) enters into a Charter with B (operator) for a rig for 3 years LOGIC Standard Form includes termination for convenience Compensation for termination after the Commencement Date is 90% of the rig rate for the three year period Global recession occurs B seeks to terminate for convenience before the Commencement Date Is the termination valid or in breach of the charter? 30
BP Exploration Operating Company Limited v Dolphin Drilling Limited [2009] EWHC 3119 (Comm) High Court upheld BP s right to terminate for convenience Accepted that this was unattractive for Dolphin but: Based on a model form Other clauses allowed termination before the Commencement Date Dolphin may have shown the clause was unattractive but it was not absurd Not suggested that BP had acted in bad faith New scenario: But what if BP had sought to renegotiate or give the work to another rig owner? Abbey Developments Ltd v PP Brickwork Limited [2009] EWHC 3119 ENE Kos 1 Ltd v Petrolio Brasiliero SA (No.2) [2012] UKSC 17 31
Relationship between termination for breach and convenience Termination for convenience a cap on damages? Conflicting authorities: Comau UK Ltd v Lotus Lightweight Structures Ltd [2014] EWHC 2122 (Comm) - Damages would be limited to the damages determined under termination for convenience even though the clause was not exercised. Willmott Dixon Partnership Ltd v London Borough of Hammersmith and Fulham [2014] EWHC 3191 (TCC) - Defendant would not have terminated for convenience and therefore damages could not be assessed on the basis that the defendant would have immediately exercised its right to terminate. Alternative of termination for convenience: Ensures contract comes to an end Cap to financial exposure But, likely associated cost 32
Conclusions Read contract carefully Threshold to trigger termination will depend upon interpretation of contract as a whole: Notice provisions Consequences of termination Specific words of the termination clause Consider relationship to common law rights Are you seeking common law damages; or Specific contractual remedy 33
34 Questions?
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