Early Termination of Resource, Energy and other long

John Randall QC
Early Termination of
Resource, Energy
and other long-term
Contracts
Common Issues,
Common Solutions
Dili, Timor L’Este
July 2014
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts
•
Termination at Common Law: some ‘revision’:



‘Conditions’
Mere warranties
Intermediate Terms
Anticipatory Breach
Communication
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts
•
Express Termination Clauses:

Purpose

Wording

Effect if validly operated

Strict compliance by terminating party necessary?
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Must terminating party act reasonably/in good faith?
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts
•
Case Studies: Communication and Strict Compliance
Compare:

Vitol SA v Norelf (common law)
with

Geys v Société Generale (express termination clause)
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts: CASE STUDY
•
Vitol SA v Norelf (The Santa Clara) [1996] AC 800 (HL)
 Cargo of propane gas (a volatile market)
 Market price plunged before ship loaded $400→$170pmt
 Vitol gave notice to terminate while loading underway
 Norelf did not respond, loading completed, ship sailed,
and Norelf sought to re-sell the gas on the open market
In the factual context, that alone was sufficient
acceptance of the buyers’ (Vitol’s) repudiatory breach
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts: CASE STUDY
• Geys v Société Generale [2013] 1 AC 523 (UKSC)
 Banker employed with increasing bonus entitlement
 ETC operable immediately by making payment in lieu
 29 Nov: banker told terminated with immediate effect
 18 Dec: correct sum paid into banker’s account
 New Year: bonus went up from €7M to >€12.5M
 6 Jan: receipt of letter saying what bank had done
 Banker got higher bonus: no termination before 6 Jan
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts
•
The ‘Changing Horses’ or ‘Second Thoughts’ principle
Exceptions:

Where an ‘election’ is involved (e.g. consequences of
two types of termination incompatible)

Estoppel / Waiver
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts
•
Case Study: Where giving notice under an ETC does
involve an election not to terminate at common law

Shell Egypt v Dana Gas
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts: CASE STUDY
• Shell Egypt v Dana Gas Egypt [2010] EWHC 465 (Comm)
 Dana had petroleum concession in Egypt as ‘contractor’
 “FIA” agreement with Shell, including ETC
 Shell: we accepted repudiation OR exercised the ETC
 Arbitrators:- Dana did repudiate but not accepted
:- ETC operated, but no right to expectation damages
 ETC gave rise to alternative rights, thus notice under it
could not be acceptance of repudiation at common law
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts
•
Consequences of ETCs:

Loss of common law rights?

Minimum level of seriousness for repudiatory breach
CASE STUDY: Amoco (UK) Exploration v British American

Starting presumption: common law rights not excluded
CASE STUDY: Dalkia Utilities v Celtech International
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts: CASE STUDY
•
Amoco (UK) v British American [2001] All ER (D) (Nov)
 Contract min. 12 months for rig to drill/test oil wells
 Design & build of rig (Rowan Gorilla V) cost D $225M
 Daily hire $175,000 (c. $65M per annum)
 Amoco: termination notice (late arrival) 19 Jan 99
 BAO: on hire 25 Dec 98, repudiation accepted 22 Oct 99
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts: CASE STUDY
• Amoco (UK) v British American (continued)
 Amoco’s attempted operation of ETC ineffective
 triggering failure had not occurred
 no adequate notice served giving opportunity to remedy
 Common law rights not excluded, but:
 any breach not so serious & would have been remedied
 NB grounds under ETC set minimum level for repudiation
 Judgment for BAO (hire + damages to total 12 months)
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts: CASE STUDY
• Dalkia Utilities v Celtech [2006] 1 Lloyd’s Rep 599
 Long-term contract to provide energy to paper mill
 ETC exercisable on various grounds inc. non-payment
 ETC triggered- material breach of duty to pay charges
 Linked clause setting our rights upon a termination
did not sufficiently clearly displace common law right
to terminate on true repudiation e.g. refusal to perform
 BUT breaches not sufficient to constitute repudiation
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts
•
Other consequences of ETCs:

Need the termination be immediate?
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Is termination possible before performance is due?

Measure of accompanying damages
CASE STUDY: express clause penal? Dalkia Utilities

Reducing the risk of an ‘own goal’ by terminating
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts: CASE STUDY
• Dalkia Utilities v Celtech (again)
 Were express provisions in event of termination under the
ETC unenforceable as penalties?
 Test: A punishment for breach or in terrorem of offending
party, or simply a genuine pre-estimate of loss?

Not penal – just brought forward time when Celtech had to
make capital repayment (entitling them to keep the plant)

Had judge construed them as giving rise to immediate
obligation to pay future charges inc. operational element
(so for service not provided), would have been a penalty
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts
•
Advantages of terminating at common law include:
 Preserving claim to loss of bargain damages
 More flexibility as to facts giving the right to terminate
 May be no obligation first to offer opportunity to remedy
 Anticipatory termination may be possible
 More flexibility as to sufficient communication
John Randall QC
Early Termination of Resource, Energy
and other long-term Contracts
•
Advantages of terminating under an ETC include:
 Greater certainty as to whether right to do so has arisen
 In principle, no need to establish a repudiatory breach
 Termination taking effect on future date may be possible
 Reduced risk of a fatal ‘own goal’ if no right to do so
 If no ‘election’, may always rely on common law later
Contact us:
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