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The issues came up first before the arbitration Tribunal appointed to hear the matter. The Tribunal ruled that Dana was in repudiatory breach but that Shell had not accepted the repudiatory breach as terminating the contract under general law; instead Shell had exercised their contractual right to terminate for a subsequent breach of contract. The arbitrators held that by choosing to terminate under the contract for a subsequent breach, Shell, in effect, was affirming the contract after the previous repudiatory breach (as, according to Shell’s own actions, the contract remained live after the first breach in order to enable Shell to terminate under it for the second breach). Therefore, the Tribunal held, Shell had no right to claim damages for breach of contract. Also, as the contract provisions did not provide for recovery of any sums upon termination under the contract, Shell could not claim any sums upon termination at all.

Shell challenged the arbitrator’s decision before the High Court. The High Court upheld the Tribunal’s decision. The Court said that when Shell issued a notice of termination under the contract, Shell had made a serious error. Instead of relying on their right under English law to terminate due to a repudiatory breach of contract - thus entitling Shell to sue for damages - Shell exercised the contractual termination mechanism which afforded them no right for payment on termination or to claim damages.

As a result of its decision, Shell lost the right to recover its $15 million investment because the termination provision in the contract did not allow for recovery of any sums paid under the contract. Shell may well appeal this decision, and we will have to wait and see if a higher court accepts Shell’s challenge.

What could Shell have done? The High Court gave a possible approach. It said it “… can see no reason why Shell could not have served a notice which accepted the repudiatory breach as terminating the contract but, in the alternative, in case they were wrong in asserting that [Dana] were in repudiatory breach, exercised the contractual right to terminate…”. This is not an uncommon approach as it preserves a party’s right to argue for an alternative argument if its primary argument is held to be unsustainable.

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COMMENT Comment on this article

Firstly, you must ensure you understand the implications of terminating a contract under the contract and your rights upon termination under the governing law. If, as in the Shell contract, there is no right to recovery monies under the contract post termination, you should seek to terminate under general law and recover damages. Sometimes, the contract may provide for a greater scope of recovery than the governing law would – check the terms of the contract and take legal advice before seeking to exercise your right to terminate.

Secondly, be conscious that once an act of repudiation has been committed by the other party, your own acts in response can be very important. By continuing to perform the contract, you may well have taken to have affirmed the contract and excused the repudiation. If that is not your intention, use clear words to express the position to the other party.

Shourav Lahiri is a Partner in the international law firm Pinsent Masons LLP. He wishes to thank Ms Helen Turner of Pinsent Masons LLP for her assistance with this article. Pinsent Masons LLP has been selected as the Global Construction Law Firm of the Year 2009 by Who’s Who Legal and as one of the Top 10 international firms doing India work by the India Business Law Journal in June 2009.