Want to Terminate a Contract? Be Careful What You Wish For

The recent decision in Shell v Dana Gas Egypt Limited[1] has highlighted the danger of getting the process wrong when seeking to terminate a contract following a repudiatory breach, and serves as a useful reminder of the choices to be made when considering termination.

The decision in the Shell case

In this case, a repudiatory breach had occurred which Shell could have chosen to accept, terminating the contract and giving Shell a right to seek damages. However, due to a mistake Shell chose instead to serve notice exercising a contractual right to terminate on 30 days' notice. This notice was effective to terminate the contract but, by choosing this route, Shell was bound by the terms of the contract which gave it no right to recover the US $15 million it had invested in the contract.

On appeal to the High Court, Shell failed to persuade the court that its termination letter could instead be regarded as an acceptance of the repudiatory breach: the court regarded the letter as communicating an unequivocal intention to terminate under the contractual provision.

Common law and contractual termination

The decision highlights the differences which can exist in the termination rights given by the common law and contract. In a termination situation, careful consideration needs to be given to the options and their potential consequences, and equal care given to the way in which the termination is phrased. In the Shell case, for example, the court was influenced by its view that a reasonable interpretation of Shell's termination letter was that it had decided to use the contractual termination route to obtain certainty that the contract was terminated and there was no further obligation to perform. There was no attempt to rely on the repudiatory breach and use the contractual right in the alternative.

Problems with termination for repudiatory breach

Termination for repudiatory breach under common law is a useful weapon, particularly as it has the potential to allow a damages claim for post-termination losses: it can, however, lead to disputes over whether there has in fact been a repudiatory breach.

To exacerbate the problem, if a party terminates the contract alleging repudiatory breach and this is later found not to be the case, then that party will itself be in repudiatory breach. This was highlighted in the recent case of Seadrill Management Services Ltd v Oao Gazprom[2] where one party alleged that negligent damage caused to a drilling rig was a repudiatory breach and terminated the contract. However, it was held that the breach was not repudiatory and consequently the termination was wrongful.

Both the Shell and Seadrill cases highlight some of the problems that can occur if a party wishes to terminate a contract: care is needed to ensure that you get the result you want with the consequences you have planned.

[1] Shell Egypt West Manzala GmbH & another v Dana Gas Egypt Ltd [2010] EWHC 465
[2] Seadrill Management Services Ltd v Oao Gazprom [2009] EWHC 1530