How not to terminate a contract
SHELL EGYPT WEST v DANA OIL EGYPT [2010]
This decision highlighted the importance of selecting and making clear in communications the right termination option when seeking to end a contract and provides a useful reminder of the choices to be made when thinking about terminating.
facts:
- A contract between the parties contained various clauses governing the circumstances under which S could either extend or end its involvement in a project and, if that occurred, which payments would be made as between the parties. Some of these were related to breach by D and some were not.
- S had one particular right to terminate the Agreement in specific circumstances unrelated to breach where D would not be obliged to repay S’s initial $15million investment. S had other rights to terminate and/or rescind (ie treat the contract as if it had never existed) in circumstances where the investment had to be repaid.
- S believed that a particular right of termination had arisen. S wrote to D terminating the contract on 30 days' written notice and then referred to a provision in the Agreement which provided that they were entitled to a repayment. D denied that any such repayment was required.
decision:
- The dispute went to arbitration. The arbitrators agreed with S and found that D was both in repudiatory breach as S claimed but also that S was entitled to rescind the contract due to a separate breach. This is important because if S had sought to terminate on either basis it would have been entitled to its $15million back. However, they held that because of the way the termination notice had been drafted, S had simply terminated on 30 days’ notice under a particular provision which did not oblige D to make any repayment. S appealed.
- On appeal to the High Court it was found that S had made a mistake in terminating under the particular contractual provision that they did. S's termination letter could not be interpreted as either terminating the contract for repudiatory breach nor rescinding it for breach.
- This act of termination pursuant to a specific provision of the contract affirmed the continuing existence of contract, which had the effect of depriving S of the chance to claim the return of its $15m investment. If S had terminated on the basis of repudiatory breach or exercised its right to rescind, it could have reclaimed its investment.
- The Judge said S could have served a notice which accepted the repudiatory breach as terminating the contract and, in the alternative, just in case it was wrong in asserting that a repudiatory breach had occurred, exercised the contractual right to terminate afforded by the termination on notice clause. As S did not serve the notice in this way, it lost its right to the repayment.
points to note:
- The right to terminate a contract is an extremely valuable one but it has to be exercised with great care particularly where there are various options and, as in this case, the consequences of each are potentially very different.
- To make matters worse, if one party terminates a contract alleging a substantial breach or breaches and the basis for termination is later found to have been insufficient, then that party will itself be in breach and potentially liable in damages quite apart from releasing the other party from repayment and other obligations and liabilities.
- So the clear message is that any notice terminating a contract needs to be considered extremely carefully or you may lose all your rights and expose yourself to a claim for damages even though you were, originally, entirely innocent.
- Consider how any notice of termination will be construed by the so called ‘reasonable recipient’ since that is the test, not what you intended or thought the notice meant.