In the recent case of Shell Egypt West Manzala GMBH v Centurion Petroleum Corporation, the Court considered a party's right to terminate a contract in accordance with its terms and suggested that, for the avoidance of doubt, a party may rely on alternative termination rights.

The key issue before the Court was whether the exercise of a contractual right to terminate amounts to an affirmation of the contract because the party is relying on the contract's terms, or whether the exercise of the contractual right may later be used as acceptance of a repudiatory breach.

By way of background, the parties had entered into an agreement under which Shell Egypt agreed to participate in a joint venture in relation to petroleum exploration activities in the Nile Delta. The agreement contained termination provisions granting Shell Egypt the right to terminate the agreement in certain circumstances. Shell Egypt, believing one of the circumstances to have occurred, purported to terminate the agreement under a provision which would entitle it to the return of $15 million in payments made under the contract.

In fact, Shell Egypt had made a mistake in believing that the circumstance had occurred. This error would prove to be catastrophic.

At a subsequent arbitration, Shell Egypt accepted its mistake but successfully argued that Centurion was in any event in repudiatory breach of the contract and that it was in further breach in a manner which entitled Shell to exercise a contractual right to rescind.

However, the arbitrators concluded that Shell Egypt had neither accepted the repudiatory breach as terminating the contract nor exercised the contractual right of recission. What Shell Egypt had done was to exercise a contractual right to terminate on 30 days' notice, under a provision which entitled Shell Egypt to no right to damages or recovery of sums paid under the agreement. The arbitrators decided that Shell Egypt's actions had affirmed the agreement, which therefore terminated by operation of its provisions.

The case went to the High Court on appeal by Shell Egypt.

Reliance on Alternative Termination Rights

Tomlinson J restated the legal position that a right to terminate contractually for breach of contract may be effective as acceptance of a repudiatory breach, but only where the contractual provision invoked was built on common law remedies for breach of contract (see the decision in the Court of Appeal case Stocznia Gdynia v Gearbulk Holdings Ltd [2010]). In other words, in circumstances where the same rights exist under contract and general law.

However, Tomlinson J noted that where the contract and the general law provide a party with alternative rights with different consequences, the terminating party will have to elect between the rights (see Dalkia Utilities Services plc v Celtech International Ltd [2006]).

In Shell Egypt's case, the contract and general law provided Shell with alternative rights. Tomlinson J found that a reasonable recipient of the termination notice would not have understood Shell Egypt as relying on repudiatory breach - but only on the contractual provisions. Therefore, the use of a contract term was inconsistent with acceptance of a repudiatory breach. The Court confirmed the arbitrator's decision, leaving Shell Egypt with no right to damages or recovery of sums paid under the agreement.

Interestingly, in his judgment, Tomlinson J suggested that Shell Egypt could have served a notice which accepted the repudiatory breach as terminating the contract, but, in the alternative, in case it was wrong in asserting that Centurion were in repudiatory breach, also exercised the contractual right to terminate.

Points to Consider

The case gives a clear message that a party should exercise caution when preparing a notice of termination. The Court's interpretation of a letter of a termination may affect whether the terminating party is entitled to recoup any monies under the agreement.

The judgment is novel as it gives scope for a party to protect its position by relying on alternative termination rights. It remains to be seen whether the judgment will be followed. In the meantime, as a precaution and where the option arises, a party should give serious consideration as to whether to exercise alternative rights to terminate.

Author: Tabitha Siklos, Solicitor

Case: Shell Egypt West Manzala GMBH, Shell Egypt West Qantara GMBH v Dana Gas Egypt Limited (formerly Centurion Petroleum Corporation) [2010] EWHC 465 (Comm)