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Exercising a Contractual Right to Terminate: What's Good Faith Got to do With it?

Document Cited authorities 2 Cited in Related
Vincent
Date01 January 2017
Pages88-93
DOI10.3366/elr.2017.0390
Published date01 January 2017

In Monde Petroleum SA v Westernzagros Ltd.,1 the English High Court2 considered a number of issues arising from the entry into, and subsequent termination of, an agreement for consulting services to be provided by Monde to Westernzagros. Of particular interest is the Court's observations on the purported termination of the parties' contract, and especially on the role of good faith in exercising a contractual right to terminate. These aspects of the case will be the focus of this piece.

THE FACTS

Westernzagros (WZL) was seeking to enter into an exploration and production sharing agreement (EPSA) with the administration of the Kurdistan Regional Government, to explore oil and undertake oil production in the Kurdistan region of Iraq. To assist it in entering into an EPSA, WZL entered into a consultancy agreement with Monde.3 In terms of the agreement Monde agreed to perform such consultancy services as requested by WZL4 including giving advice, support, and cooperation, as well as introduction services in relation to the public and private sector in the Federal Region of Kurdistan and Iraq. The consultancy agreement also required Monde to be proactive and use its initiative, connections and influence in the Federal Region of Kurdistan and Iraq.5 In return for providing the consultancy services Monde would receive a retainer fee each month and would also receive a success fee on the happening of certain events.6 The agreement also provided for an option of 3% in the EPSA in Monde's favour, in terms of which Monde would profit from any oil exploration and production undertaken under the EPSA. The option was only available to Monde once certain events had occurred including the receipt by WZL of a confirmation and support letter from the Government of Iraq to the EPSA.7

The consultancy agreement was entered into in April 2006. It lasted initially for a period of four months, or longer at WZL's election. It could be terminated by WZL on thirty days' notice to Monde if the EPSA did not become “fully operational and enforceable” within 6 months of the date of commencement of the consultancy agreement.8 Following a period of negotiations and failed attempts to agree an EPSA, an EPSA was eventually entered into between WZL and the Kurdistan Regional Government in February 2007. The EPSA was formally ratified by the Regional Government, but no confirmation and support letter from the Iraqi Government was obtained.9 In March 2007 WZL served a notice purporting to terminate the consultancy agreement. In April 2007 Monde and WZL signed a termination and release agreement (TRA) regarding the termination of the consultancy agreement.

Monde subsequently challenged the validity of the TRA, arguing that it had been induced to enter into it by misrepresentation.10 The Court found that Monde had been induced to enter the TRA by misrepresentations made on WZL's behalf, which entitled Monde to damages under s.2 of the Misrepresentation Act 1967.11 That however, was not the end of the matter as the level of damages recoverable by Monde was affected by other questions...

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