Home / COMMENT / Business / Innocent termination

[More Images]

Shourav Lahiri on how to terminate a contract correctly when it is breached by the other party

The courts of England and Wales have just delivered a cautionary tale in their decision in Shell Egypt West Manzala GMBH (“Shell”) and Dana Gas Egypt Limited (“Dana”) (formerly Centurion Petroleum Corporation) on how the choice of approach to termination could affect the extent of recovery by the innocent party. Let us consider the impact of this ruling on construction contracts in India.

Most standard form contracts include clauses entitling one party to terminate the contract if the other party commits a major breach of contract. The contracts also provide for financial claims the innocent party is entitled to after such termination. (See, for instance, Clause 63 of the FIDIC Red Book 4th Edition 1987 and Clause 15 of the FIDIC Red Book 1999.)

Very often, there will also be a right under the governing law of the contract for an innocent party to terminate the contract upon breach the other party. For contracts governed by Indian law for instance, Section 39 of the Contracts Act provides for the right to terminate upon a party’s refusal to perform the entirety of his obligation, and this principle is also enshrined in caselaw (see, for instance, Khettramohan Dey & Co. v Binode Behari (AIR 1930 Cal 382). To entitle a party to terminate however, the breach of contract must be one that prevents substantial performance of the contract; a minor breach will not be enough.

However, just because one party has committed a repudiatory breach of contract does not mean that the contract is automatically terminated. The innocent party can ‘elect’ how to proceed: he can either accept the repudiation (and thereby terminate the contract) or not accept the repudiation, and affirm the contract, thereby excusing the repudiation. Once a contract has been affirmed, the party cannot subsequently rely on the previous repudiation to seek to terminate the contract.

One might assume that if a right to terminate upon repudiation exists both under the contract and under general law, the consequences in terms of recovery by the innocent party will be the same.

This is not so, and the High Court of England and Wales has sent a timely reminder of this in Shell Egypt West Manzala GMBH and Dana Gas Egypt Limited (formerly Centurion Petroleum Corporation).

Story continues below

Advertisement

COMMENT Comment on this article

Dana (formerly Centurion Petroleum Company) approached Shell to discuss their participation in a venture to engage in petroleum exploration and exploration activities in Egypt. Shell and Dana entered into a co-operation contract in March 2006 as which stage Shell invested $15 million into the venture.

Partway through the project there was a change of ownership in Dana. Shell claimed that Dana failed to issue the correct notices to it relating to the change of control and that this constituted a repudiatory breach of contract. Shell sought to terminate the contract. A dispute arose between the parties and arbitration proceedings were commenced.

Shell claimed damages for a repudiatory breach of contract. Shell also claimed (in relation to a different breach of contract) that they had contractual right to rescind the contract. Dana denied all breaches of contract and argued that if there was a breach, it was not repudiatory in nature.

Furthermore, it argued that as Shell had terminated the contract by using the contractual mechanism rather than under general law, it was not entitled to damages. Interestingly, for termination for repudiation under the contract, Shell was not entitled to recovery of any sums.