Introduction

In Shell Egypt West Manzala GmbH v Dana Oil Egypt Ltd [2010] EWHC 465 (Comm), the Plaintiff (“Shell”) had both the right to terminate its contract with the Defendant (“Dana”) for repudiatory breach, and to terminate under a specific clause of the contract. In the mistaken belief that the contractual terms allowed it to reclaim certain monies paid to Dana upon contractual termination, Shell chose to invoke the termination clause. Upon learning of its mistake, Shell argued that its notice of termination should also be capable of constituting an acceptance of Dana’s repudiatory breach, thus entitling it to claim common law damages.

However, the English High Court disagreed. It was held that a notice of contractual termination cannot serve as an acceptance of repudiatory breach if the contract and general law provide alternative rights which have different consequences. Since the rights and consequences under the contract at hand differed from common law, Shell’s notice could not be said to constitute an acceptance of repudiatory breach.

This case can be contrasted with the case of Stocznia Gdynia SA v Gearbulk Holdings Ltd [2010] QB 27, which was covered in a previous Client Update in October 2009.

Tomlinson J also included a word of advice to contracting parties in his judgment. He pointed out that Shell could have served a notice which accepted the repudiatory breach, and also invoked the termination clause in the case that there was no actual repudiatory breach. In other words, parties should cover their bases by framing their termination notice more broadly, or else properly assess the alternatives available to them to ensure that only the most beneficial option is relied on. The Court will not assist careless parties now enlightened by hindsight.

Brief Facts

  1. (1) The Plaintiff (“Shell”) and the Defendant (“Dana”) had entered into a contract (“the Contract”) to participate in petroleum exploration and exploitation activities pursuant to a concession agreement. The relevant terms are as follows:
    1. Clause 3.1.8: Dana was to assign half of the concession to Shell by a certain date (“Closing Date”), failing which Shell could elect to terminate the Contract. The Clause also sets out the obligations and liabilities of the parties following termination.
    2. Clause 3.1.9: If the failure to meet the Closing Date was due to the absence of ‘CTIP Acquisition’, then Shell was entitled to the return of all payments made under the Contract.
  2. Dana eventually committed certain acts of repudiatory breach, and also failed to meet the Closing Date. Shell thus became invested with the right to rescind at common law, and also with the right to terminate under Clause 3.1.8.
  3. However, Shell mistakenly believed it was entitled to rely on Clause 3.1.9 to secure the return of US$15 mil, when in reality it could not. Labouring under this misconception, Shell issued a letter of termination (“the Termination Letter”) to Dana, which Dana accepted.
  4. Shell then argued that the Termination Letter, despite implicit and explicit reference to Clause 3.1.8 and 3.1.9, can also be regarded as an acceptance of Dana’s repudiatory breach.  

Issue

The Court had to determine whether the Termination Letter could constitute an acceptance of repudiatory breach to terminate the Contract.

Holding Of The High Court

It was held that the Termination Letter could not constitute an acceptance of repudiatory breach.

  1. Because the consequences and rights under contractual and common law termination were different, Shell had to elect between the two forms of termination.
  2. A reasonable person in Dana’s position would have read the Termination Letter as

unequivocally communicating an election by Shell to terminate the Contract under Clause 3.1.8.

The Need For Election

The innocent party is not always required to elect between common law repudiation and contractual termination. Here, the Court discussed when such election is necessary.

  1. Acceptance of repudiation only requires the communication of a clear and unequivocal intention to treat the contract as discharged (Vitol SA v Norelf Ltd [1996] AC 800).  
  2. If the contract and common law provide alternative rights which have different consequences, the injured party will have to elect between them (Dalkia Utilities Services plc v Celtech International Ltd [2006] 1 Lloyd’s LR 599 (“Dalkia”)).  
  3. Where the contract provides a right to terminate which corresponds to a right under common law, no election is necessary (Stocznia Gdynia SA v Gearbulk Holdings Ltd [2010] QB 27 (“Stocznia”)).

Here, it was found that the Contract and common law provided Shell with alternative rights which had different consequences. Clause 3.1.8 established a set of obligations and liabilities which differed from those arising from repudiation. Therefore, Shell had to elect between the two.

Construction Of Termination Letter

Although the Termination Letter did not expressly refer to Clause 3.1.8, it was found that there was sufficient reference to the contractual right to terminate that a reasonable recipient would have read it as an election to terminate under Clause 3.1.8.

Shell argued that its mistaken invocation of Clause 3.1.9 in the Termination Letter should have alerted Dana to the fact that Shell had misinterpreted the events. However, this was not enough to remove the thrust of the letter – that Shell intended to terminate the Contract under Clause 3.1.8. In any event, Shell could have served a notice which accepted the repudiatory breach, and invoked contractual termination only upon failure of repudiation.

Therefore, Shell could not rely upon the remedies that flowed from repudiatory breach, and could only rely on those specified in Clause 3.1.8.

Concluding Words

As stated above, this case can be contrasted with the case of Stocznia, where the contractual and common law rights of termination were held to be the same. It can also be compared with Dalkia, where the consequences were held to be “markedly different”. While it may be clear in certain situations whether the contractual and common law rights of termination are different, specific rules or criteria have yet to be established.

Presumably, there is always going to be a measure of dissimilarity between the damages or remedies available under contract and common law; otherwise, there would be no issue as to which source of law to rely on, since the result would be the same. Very rarely do termination clauses merely provide for the right to terminate upon certain events, and stay silent as to the ensuing rights and liabilities of the parties. Even in Stocznia, the plaintiff wished to rely on common law repudiation because it believed it could attain a higher amount of damages.

Therefore, it is hoped that the courts will set out a clear picture as to where the line between similarity (as in Stocznia) and dissimilarity (as in Dalkia) lies.