Contractual termination, instead of rescission, costs Shell USD15m

Introduction

The High Court decision in Shell Egypt West Manzala GMBH and anor v Dana Gas Egypt Ltd (formerly Centurion Petroleum Corporation) is a reminder that parties to a contract should be careful when deciding the grounds on which to terminate a contract and when drafting termination notices. 

Shell's actions in choosing its ground for terminating a contract, and in drafting its termination letter, left it with no right to recover USD15m paid under an agreement and no right to damages, despite Centurion having been in repudiatory breach of the contract, and in breach of a warranty which entitled Shell to exercise a different contractual right to rescind the contract.  The High Court decision was on appeal against an arbitration award.

The Background and the Arbitration

The arbitration arose out of a “ Farm-In and LNG Co-Operation Agreement ” (“the FIA” )between Shell and Centurion.

Clause 3.1.8 of the FIA stated that if a "Closing Date" had not occurred within nine months following the agreement date Shell could elect to terminate the FIA by giving 30 days' notice in writing. In such event, Centurion would not be obliged to repay Shell an initial payment of USD15 million.

By clause 3.1.9, if closing did not occur within nine months because a condition precedent (that Centurion completed the acquisition of certain concessions which it did not already own) had not been satisfied, and Shell elected to terminate in accordance with clause 3.1.8, then Centurion was obliged to refund the initial USD15m payment.

By letter dated 22 December 2006, Shell gave 30 days' notice of its election to terminate the FIA, noting that the Closing Date had not occurred.  Shell also noted that Centurion had not acquired the concessions, and that in accordance with clause 3.1.9 Centurion was to refund the payments.  Shell was wrong about the concessions - Centurion had obtained the concessions and delivered evidence of this to Shell about a month beforehand.  On 23 December 2006 Centurion wrote accepting Shell's notice of termination and waiving the 30 day notice period.

The parties had accepted in the arbitration that Shell was not entitled to invoke clause 3.1.9, and that  Centurion was under no obligation to refund payments to Shell.

The arbitrators held that Centurion were in repudiatory breach of contract, and that they were also in breach of a warranty which entitled Shell to exercise a contractual right to rescind under another clause (clause 5.2(b)) of the contract. However they also held that Shell had neither accepted the repudiatory breach as terminating the contract nor exercised their contractual right of rescission. The arbitrators decided that Shell had exercised a contractual right to terminate on 30 days' notice pursuant to clause 3.1.8 of the FIA . That right had been exercised by the letter dated 22 December 2006.  It followed that the FIA terminated by operation of its provisions, and waiver of the notice period, in circumstances which left Shell with no right to damages or recovery of sums paid under the Agreement.

The High Court decision on appeal

  The point on appeal was whether Shell's notice letter could properly be regarded as Shell's acceptance of Centurion's repudiatory breach as terminating the contract.  Acceptance of a repudiatory breach requires evidence of a clear and unequivocal intention to treat the contract as discharged on the grounds of that breach. 

The Judge said that this was a case where the contract and the general law provided Shell with alternative rights which had different consequences.  The critical question was whether Shell had affirmed the contract (for the notice period), and whether its termination letter could be read by a reasonable recipient in the position of Centurion as unequivocally communicating an election by Shell to terminate the contract under clause 3.1.8 if clause 3.1.9 did not apply.  The Judge noted that Shell could have served (but did not serve) a notice which accepted Centurion's repudiatory breach as terminating the contract and in the alternative relied on the contractual right to terminate under clause 3.1.8.

Having reviewed the detailed factual background and all relevant terms of the FIA, the Judge held that in all the circumstances a reasonable recipient in Centurion's position would not regard it as implausible that Shell had simply decided, for commercial reasons, to cut its losses and withdraw from the FIA on a basis which offered certainty that no other contractual obligations would fall due for performance.  The consequence was a finding that the arbitrators' decision on the point under appeal was correct, and a finding that the termination letter was not effective to bring about contractual rescission for Centurion's breach of warranty under clause 5.2(b) of the contract.