Making a clean break – are your termination clauses sufficiently slick?
25 January 2018
It is worth giving careful thought when drafting termination provisions in commercial contracts to help avoid tricky disputes about when, and in what circumstances, agreements can be brought to an end early. In Monde Petroleum v Westernzagros the Court of Appeal considered when an exploration and production agreement (EPSA) became “fully operational and enforceable” for the purposes of a termination clause in a consultancy agreement and when a termination notice could be served.
Westernzagros engaged Monde under a consultancy agreement to help Westernzagros negotiate an ESPA for oil with Kurdistan. The ESPA was executed and ratified by Kurdistan. The consultancy agreement said that Westernzagros could terminate “on thirty days’ notice to [Monde] should the EPSA not become fully operational and enforceable within six months from the date [the EPSA]”. Westernzagros served a termination notice. Monde brought proceedings to set aside the termination notice and/or to claim damages for repudiatory breach.
This is what the Court of Appeal had to say:
- Meaning of “fully operational and enforceable”. The issue was whether the phrase meant (as Monde contended) that it was sufficient that the ESPA was executed and ratified by Kurdistan; or (as Westernzagros contended) that all the various milestones had to be passed including Iraq signing a letter confirming the EPSA. The phrase had to be interpreted consistently throughout the agreement. The use of the phrase elsewhere implied that the aim of the consultancy agreement was for Monde to help Westernzagros secure a fully enforceable and fully operational ESPA; anything less than that would not be enough. The judge was right to choose the milestone that made more commercial sense in the context of the situation existing at the time the consultancy agreement was made, namely that the EPSA was not “fully operational and enforceable” until Iraq signed a letter confirming the EPSA.
- When could the termination notice be served? No requirement for immediacy was expressed in the termination provision and there was no reason for it to be implied. Westernzagros had an additional right to terminate the consultancy agreement where it was “manifestly apparent that an operational enforceable [EPSA]…cannot be concluded”. To lock Westernzagros into the consultancy agreement until that time would be highly uncommercial. As the only options before the court were to interpret the relevant clause as requiring Westernzagros to terminate immediately on the six-month anniversary of the consulting agreement and otherwise forfeiting that right, or as giving Westernzagros the right to terminate at a time of its own choosing at any time while there was no “fully operational and enforceable” EPSA, the court “unhesitatingly” chose the latter.
My overview of the first instance decision, which focuses on good faith arguments not considered on appeal, is available here.