SHELL EGYPT WEST MANZALA GMBH V DANA GAS EGYPT LTD

[2010] EWHC 465 (Comm), Queen's Bench Division, Commercial Court, The Hon Mr Justice Tomlinson, 10 March 2010

Contract - Repudiatory breach - Failure to accept repudiation - Failure to exercise contractual right to rescind - Whether agreement terminated or rescinded

Shell appealed against an arbitration award arising out of a "Farm-In and LNG Co-Operation Agreement" ("FIA") concluded between the parties on 17 March 2006. Dana Gas, the defendant, held concessions for petroleum exploitation together with a third party and concluded the FIA with Shell to secure its participation in the venture. The intention of the parties was that Shell should through Dana Gas acquire a 50 per cent interest in the concessions from a third party. This never happened. The FIA contained a clause 3.1.8 to the effect that if it had not occurred within nine months following the 17 March 2006, Shell had the right to elect to terminate the FIA by 30 days' notice in writing. A termination under clause 3.1.8 did not generate any right to recovery of sums paid under the FIA for Shell. The FIA further provided, by clause 3.1.9, that if the reason for the acquisition not having occurred within the nine months was that Dana Gas had not completed their acquisition of the concessions from the third party, then Shell, on electing to terminate under clause 3.1.8, were additionally entitled to the return of all payments made under the contract. Shell sent a termination letter on 22 December 2006, giving 30 days' notice and asserting a right to recovery under clause 3.1.9 although Dana Gas had completed its acquisition of the concessions earlier in the year; a fact of which Shell was in fact aware. In arbitration, Shell claimed damages for repudiatory breach. Dana Gas argued that Shell had terminated as per the contract clause and was not entitled to damages. The arbitrators held that Dana Gas was in repudiatory breach of contract and that it was in breach in a manner which entitled Shell to exercise the contractual right to rescind. However they also held that Shell had neither accepted the repudiatory breach as terminating the contract nor exercised its contractual right of rescission, and that it had only exercised a contractual right to terminate on 30 days' notice pursuant to clause 3.1.8 of the FIA. It followed that the FIA terminated by operation of its provisions. This was Shell's appeal against the arbitrators' conclusion that it had neither accepted the repudiation nor exercised a contractual right to rescind. Dana Gas asserted that Shell had given 30 days' notice and that therefore had not been exercising any right to rescind.