The Commercial Court has recently decided that a contracting party to an oil and gas related consultancy service agreement could be held liable for the misrepresentations made to another contracting party when those misrepresentations were made by a third party (Monde Petroleum SA v WesternZagros Ltd [2016] EWHC 1472 (Comm)). 

Facts

In early 2006, WesternZagros Ltd (WZL), sought to negotiate and thereafter enter into an Exploration and Production Sharing Agreement (PSA) with the Kurdistan Regional Government (KRG). Following an impasse in negotiations, WZL were directed to Mr Yasser Al-Fekaiki, sole Director of Monde Petroleum SA (Monde), who had family connections within the KRG, to assist in lobbying for WZL support within the KRG. 

Subsequently, WZL and Monde entered into a Consultancy Services Agreement (CSA). The CSA allowed for monthly payments together with success fees which could be triggered by achieving ‘milestones’ linked to the PSA Seismic Program and ratification of the PSA (in the form of a Confirmation and Support Letter of the Government of the Republic of Iraq). If ratification was achieved and subject to the milestones being reached the PSA gave Monde the right to acquire a 3% working interest in the PSA. 

In May 2006 a PSA was signed between WZL and the KRG (less than 2 weeks after the execution of the Monde CSA). However, at that stage the PSA had yet to be ratified. Prior to or during the PSA negotiations, Monde (unbeknown to WZL) had formed an arrangement with Bafel Talabani (Bafel), son of the President of Iraq and a Commander of the KRG’s Counter Terrorism Group, who had been involved in the PSA negotiations. 

In March 2007, after concerns regarding performance and rumours of a ‘fall from grace’ in the region, WZL faxed a Notice of Termination to Monde. However, the Notice of Termination did not provide the requisite 30 day notice period in accordance with the Termination provisions of the CSA. In April 2007, a Termination Agreement was sent to Monde. Monde refused to sign. 

There was then a change in relationship between Bafel and Monde. Bafel made a series of telephone calls to Mr Al-Fekaiki (sole director of Monde). Monde argued that Bafel advised that if it signed the Termination Agreement it would benefit through a new agreement between WZL and a politically controlled entity under which Monde would receive payment indirectly and would be no worse off than if the CSA had continued. Monde also argued that Bafel promised that it would receive an immediate payment of all outstanding sums due to Monde by WZL if it signed the Termination Agreement. Four days after Monde’s initial refusal, Mr Al-Fekaiki signed the Termination Agreement, on behalf of Monde.

Issues

The court was faced with deciding a multitude of arguments such as whether Monde was estopped from denying the validity of the Termination Agreement, whether WZL served the Termination Notice in bad faith, and whether in serving the Termination notice WZL breached implied terms of the CSA. Ultimately, in terms of the misrepresentation point, the court had to decide whether Monde was induced by Bafel to conclude the Termination Agreement as a result of his misrepresentations. If the answer to that question was yes, then the court would then have to decide if Bafel was acting on behalf of WZL when the misrepresentations were made. 

Decision

The Commercial Court concluded that Monde had been induced into signing the Termination Agreement by Bafel’s misrepresentations. Bafel knew his representations were false and that Monde would rely upon them to enter into the Termination Agreement.

There was no evidence that WZL had given actual authority to Bafel to negotiate on its behalf. It was for Monde to establish that WZL was legally responsible for Bafel’s representations and that WZL either (i) actually authorised Bafel to make those representations, or (ii) by its words or conduct represented or permitted it to be represented to Monde that Bafel had that authority. The only direct evidence on this point came from WZL’s Chief Executive Officer who informed the court that WZL did not give any such authority to Bafel. However, the Commercial Court did not find WZL’s witness evidence persuasive and went as far as to state the evidence was not credible.

The court confirmed that conferring such authority does not have to be proved by direct evidence and instead can be inferred from circumstantial evidence. In assessing such circumstantial evidence the court will carefully consider what was said by the third party to the other contracting party and the surrounding conduct. In this case it was evident that the third party, Bafel, was trying to negotiate a financial arrangement with WZL. The Commercial Court found in the course of those negotiations, WZL effectively asked Bafel to ‘clear the decks’ by getting Mr Al-Fekaiki to sign the Termination Agreement on behalf of Monde. 

Monde sought, and were entitled to, damages as a result of the misrepresentations. The court found that Monde had suffered no such loss. Any damages recoverable by Monde from WZL for the misrepresentations had to be assessed on the basis that WZL could and would have immediately served an effective Notice of Termination, by utilising the ‘termination for convenience’ provision contained in the CSA, which would have brought the CSA to an end. 

Comment

Although the case turns on a unique set of facts the case nevertheless provides a warning to industry practitioners when dealing with intermediaries, or other third parties, in connection with contractual discussions and particularly when discussions involve foreign governments. 

The case serves as a reminder that the courts can in certain circumstances find, on the basis of circumstantial evidence alone, that a third party’s misrepresentations were made with the authority and on behalf of that contracting party. Parties must be live to all representations made by third parties. Clear boundaries should be set regarding third party involvement and any conduct by the third party which could be construed adversely and on behalf of a contracting party should be addressed as soon as such conduct is identified.

A final point of interest relates to the protection afforded, in this instance, to WZL as a result of the inclusion of a ‘termination for convenience’ provision. Although Monde was successful in establishing a claim for damages in misrepresentation, as WZL could have terminated for convenience the Commercial Court decided that the ‘termination for convenience’ provision effectively provided a cap to recoverable damages. As the termination for convenience provision did not contain a termination fee, the damages were zero. 

The impact of ‘termination for convenience’ provisions on damages have been the subject of conflicting judicial decisions in recent years. The Commercial Court in Comau UK Limited v Lotus Lightweight Structures Limited [2014] EWHC 2122 (Comm) decided that when assessing damages, for breach of contract, it must be assumed that a contract breaker will perform a contract in the least onerous way possible, and therefore by implication, will terminate immediately if it has a right to do so under a ‘termination for convenience’ provision. Importantly, it was not necessary in Comau for the contract-breaker to evidence that it would have exercised its right to terminate for convenience. Instead, the very fact that there was such a provision contained in the contract was enough to prevent the claimant from establishing any loss incurred by them. This line of authority logically leads to the conclusion that any fee for ‘termination for convenience’ will work as a contractual cap on damages for misrepresentation or wrongful termination. If there is no fee, damages will be zero.

However, the Technology and Construction Court in the later decision of Willmott Dixon Partnership Ltd v London Borough of Hammersmith and Fulham [2014] EWHC 3191 (TCC) took a different view. The Technology and Construction Court decided that it was open to the claimant to show by reference to political, budgetary or economic considerations that the contract breaker would not have terminated for convenience. 

As a consequence, the extent to which a ‘termination for convenience’ provision will cap damages remains unclear. The Comau and Willmott decisions were not cited as authority in the Commercial Court’s decision in Monde. Instead the court followed the decision in Maredelanto Compania Naviera SAv Bergbau-Handel GmbH (The “Mihalis Angelos”) [1971] 1 QB 164, in which the Court of Appeal held, similarly to Comau, that if ‘a defendant has under the contract an option which would reduce or extinguish the loss, it will be assumed that he would exercise it’

It may assist parties in reducing uncertainty, when drafting ‘termination for convenience’ provisions, if they outline the extent to which they intend these provisions to limit ordinarily recoverable damages. In addition, the consequences of the existence of such provisions should be considered carefully when exercising contractual rights or seeking to bring claims. Monde Petroleum SA v WesternZagros Ltd [2016] EWHC 1472 (Comm)