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Early Termination of Resource, Energy and other long-term Contracts

Early Termination of Resource, Energy and other long-term Contracts. Common Issues, Common Solutions Dili , Timor L’Este July 2014. John Randall QC. Termination at Common Law: some ‘revision’: ‘Conditions’ Mere warranties Intermediate Terms Anticipatory Breach Communication.

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Early Termination of Resource, Energy and other long-term Contracts

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  1. Early Termination of Resource, Energy and other long-term Contracts Common Issues, Common Solutions Dili, Timor L’Este July 2014 John Randall QC

  2. 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

  3. 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

  4. Case Studies: Communication and Strict Compliance Compare: • Vitol SA v Norelf (common law) with • Geys v SociétéGenerale (express termination clause) John Randall QC Early Termination of Resource, Energy and other long-term Contracts

  5. 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

  6. 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: CASE STUDY

  7. 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

  8. 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

  9. 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: CASE STUDY

  10. 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

  11. 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

  12. 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

  13. 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: CASE STUDY

  14. 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

  15. 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: CASE STUDY

  16. 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

  17. 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 Early Termination of Resource, Energy and other long-term Contracts

  18. Contact us: enquiries@st-philips.com55 Temple RowBirmingham, B2 5LS 41 Park Square Leeds, LS1 2NP9 Gower StreetLondon, WC1E 6HBwww.st-philips.com Birmingham Tel: 0121 246 7000 Leeds Tel: 0113 244 6691 London Tel: 0207 467 9444

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