Offshore Floating Production
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CHAPTER 11
Termination
A Introduction
11.1 Most FPSO contracts are, as we have already stated, long-term contracts running over many years. This contractual time frame can affect how the parties approach a dispute. Often the parties may prefer to settle their differences to keep lucrative, bespoke contracts alive rather than litigate. The situation may be compared with that of long-term LNG time charters, which are notoriously dispute proof. 11.2 That is not to say that parties do not use changing market conditions to seek to change key contractual terms. When oil and gas prices fall, FP Contractors are often contacted by their clients seeking to reduce hire charges and other costs. Termination may be threatened on one basis or another. But, more often than not, the parties will find a way to accommodate each other to keep the wells open and the process trains running. 11.3 But this is not always the case. Sometimes a party will attempt to bring the charter to an early end. Given the likely value of the contracts in question, such attempts may well be hard fought. Early termination, prior to the end of the charter period, is the ‘nuclear’ option. Imagine that an FPSO has been commissioned for a particular project and the FP Contractor has spent hundreds of millions of dollars building or refurbishing that FPSO, fully expecting a 20-year revenue stream from the field to pay for that asset. If the charterer terminates that charter only two years in, the FP Contractor may find itself in a perilous financial position. 11.4 In this chapter we explore some of the issues that may arise in terminating a floating production charter (and associated contracts). We explore how the contract may be terminated, both pursuant to its express terms and also at common law, and the consequences of termination. We also consider the potential impact of the growing body of case law concerning concepts such as ‘good faith’ and ‘relational’ contracts, and how those may relate to rights of termination.B Express rights of termination
11.5 FPSO charters will commonly include express rights of termination that give one party the right to end the contract in specified circumstances. 11.6 There is nothing unusual about this. Most commercial agreements will contain express provisions setting out exactly how and when one party can bring the contract to an end in accordance with its terms. The circumstances are usually set out in long,Page 172
(i) Termination for force majeure events
11.7 Force majeure clauses are creatures of contract, rather than arising from a principle of English law, so their application depends on the wording of the specific clause. The force majeure clause often comprises a long list of carefully defined events that may, if they continue beyond a certain number of days, give the Company the right to terminate.1(ii) Termination rights for the Contractor's default or the Company's default
11.8 There will usually be a general list of events defined as defaults, which give rise to one party or the other being able to terminate the contract. Examples may include:- • A material breach by either party (which will usually also be defined so as to avoid disputes as to what breach is actually material)2 that is not cured within a set period of time;
- • The filing of insolvency/bankruptcy proceedings against the FP Contractor – or the Company, or Corporate Guarantor – that are not dismissed, possibly (albeit not always) within a certain period of time;
- • A breach of anti-corruption, anti-bribery and anti-money laundering laws applicable to the performance of the charter; and/or
- • Failure by the Company to make payments due (subject to any anti-technicality provisions and usually subject to a cure period).
- • If mobilisation (i.e. the establishment of the FPSO in the ‘Designated Work Area’ and connection to subsea lines for commencement of commissioning) is not achieved within a specified number of days;
- • On the basis of a drop in an FPSO’s daily production, which remains unremedied for a certain period of days (we consider this example further later);3 or
- • In the event of an aggregate of a specified number of days of production shut-down.
(iii) Termination for convenience
11.10 The Company will also commonly have the right in the charter to terminate ‘for convenience’, usually having to give a certain number of days’ notice effectively to be able to walk away from the charter. 11.11Page 173
(iv) Termination for delay
11.12 This right applies if the FP Contractor fails to achieve the conditions for acceptance at the field by a specified termination date – see further .C Termination at law
11.13 The aforementioned termination rights arise out of the express contractual agreement of the parties. They are quite separate from the parties’ respective rights under the common law: i.e. in circumstances where an innocent party faced with a particular breach by its counterparty can bring the contract to an end as a matter of law, requiring no express contractual provision. This takes us into the realm of concepts such as repudiation, anticipatory breach and renunciation.4 Relevant issues include: has there been a repudiation of the contract by the party in breach; has one party made it clear that it will no longer perform its side of the contractual bargain? 11.14 Seeking to rely on these common law rights can be a risky option. The consequences of incorrectly purporting to terminate a charter (whether at common law or by mistaken application of an express contractual term) are potentially both severe and significant. The party seeking to so terminate, when it has no right to do so, will place itself in repudiatory breach, such that its counterparty could terminate the contract and claim damages. It may be relatively simple to fall within one of the express termination rights. It can be much harder to say with any certainty that a counterparty is in repudia-tory or renunciatory breach. 11.15 It is therefore easy to imagine that termination is a fertile area for disputes. We give two illustrations of terminating in practice in Section E, paragraphs 11.42 to 11.56. It is also important to ensure that any notice of termination is clear as to the basis of termination so as to avoid the risk that a contract is only terminated on one basis (e.g. on the basis of an express contractual term), whereas it could (and should) have been terminated on two bases (e.g., the acceptance of a repudiatory breach in addition to the contractual termination) in order that the innocent party can claim for damages under the common law, insofar as they are not excluded. This can have a significant impact on the total sum that the innocent party can ultimately recover. See, for example, Phones 4U Limited (in administration) v EE Limited, where the failure to terminate on the basis ofPage 174
D The rise of good faith obligations and relational contracts – is there a fetter on exercising a right of termination?
11.16 The parties to an FPSO charter will usually carefully and painstakingly negotiate the circumstances in which they can terminate their contract. In assessing any right of termination, the first step is to interpret the express language used.6 A party therefore may be excused for thinking that where a situation falls squarely within an express right to terminate, that party is able to exercise that right. 11.17 It is also fair to say that many legal practitioners would probably agree with them. The view of the English courts has traditionally been that contracting parties to commercial agreements may exercise their contractual rights in the manner which best suits them, no matter the impact on the contractual counterparty. 11.18 However, in recent years there has been a number of cases examining whether a party exercising a contractual right is fettered by an implied term to do so in good faith either due to the nature of the right being exercised, or due to the right being granted in a so-called relational contract. 11.19 It is therefore important to consider whether the right to terminate is fettered by any such implied term as envisaged by the recent, and it seems ever expanding run of, cases in the English courts.7 In doing so it is helpful to examine two distinct lines of authority; the first relating to obligations of good faith culminating in the decision in Braganza v BP Shipping Limited 8 and the second focussing on relational contracts.(i) The Braganza implied term
11.20 The Braganza implied term, or the ‘Braganza duty’, is so called after the Supreme Court case referred to earlier. In essence, it is a term implied by law, such that when a party has a discretion (in the context of a contract with a contractual party), it must not only exercise that discretion honestly and in good faith (in the context of the relevant contract), but it must also not be exercised arbitrarily, capriciously, unreasonably, irrationally or for an improper purpose.9 11.21 In Braganza v BP Shipping Limited, the Supreme Court considered the nature of BP’s entitlement to refuse to pay death benefits to a widow where an internal BP investigation had concluded that her husband, Mr Braganza (who had disappeared whilst on deck as chief engineer of the British Unity), had probably committed suicide. The employment contract stated BP was entitled to refuse to pay death benefits where “inPage 175
Contractual terms in which one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts, are extremely common. It is not for the courts to rewrite the parties’ bargain for them, still less to substitute themselves for the contractually agreed decision-maker. Nevertheless, the party who is charged with making decisions which affect the rights of both parties to the contract has a clear conflict of interest. That conflict is heightened when there is a significant imbalance of power between the contracting parties as there often will be in an employment contract. The courts have therefore sought to ensure that such contractual powers are not abused. They have done so by implying a term as to the manner in which such powers may be exercised, a term which may vary according to the terms of the contract and the context in which the decision-making power is given.