Early Termination of Resource, Energy

and other long-term Contracts

Common Issues, Common Solutions

Dili, Timor L’EsteJuly 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?

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 marketIn 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 effect18 Dec: correct sum paid into banker’s accountNew Year: bonus went up from €7M to >€12.5M6 Jan: receipt of letter saying what bank had doneBanker 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?

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

John Randall QC

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