early termination of resource, energy and other long-term contracts
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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
Contact us:
enquiries@st-philips.com
55 Temple RowBirmingham, B2 5LS
41 Park SquareLeeds, LS1 2NP
9 Gower StreetLondon, WC1E 6HB
www.st-philips.com
Birmingham Tel: 0121 246 7000
London Tel: 0207 467 9444
Leeds Tel: 0113 244 6691
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