Contract termination: some salutory reminders about the rules around the right to terminate a contract

In January 2020 the Western Australian Supreme Court delivered the decision of Armada Balnaves Pte Ltd v Woodside Energy Julimar Pty Ltd [No 2] [2020] WASC 14.

Summary and context 

The case is of interest because it underlines the following:

  • the difficulty in demonstrating that a party has elected to affirm a contract (and lost its right to terminate) purely because of conduct and inaction;
  • the willingness of a court to give a reasonable period of time for the right of termination to be exercised; and
  • the importance of a party seeking to terminate for another party’s repudiation being able to demonstrate that it (the party seeking to terminate) was itself ready, willing and able to perform the key obligations contract at the time the right to terminate was exercised.

The decision related to a dispute between Woodside Energy Julimar Pty Ltd (Julimar) and Armada Balnaves Pte Ltd (Armada) over the termination of a services agreement (Contract). 

The site was the Armada Claire Floating Production Storage Offloading (FPSO) Facility used at the Balnaves oil field, located 180km northwest of Karratha.

Julimar terminated the Contract, relying on an express contractual right to terminate.  Armada challenged the validity of Julimar’s termination and sought $US283.5 million from Julimar.  This was comprised of:

  • $US275.8 million loss of bargain damages as a result of the termination caused by Julimar’s repudiation of the Contract; and
  • $US7.7 million for the work done and materials supplied pursuant to the Contract pre-termination.

Kenneth Martin J dismissed Armada’s challenge to the validity of Julimar’s termination (and the related loss of bargain claim).  His Honour found Armada was entitled to a payment of some of its pre-termination entitlement claims. 

Lavan understands that the case is presently the subject of an appeal to the Court of Appeal.  Irrespective of the outcome of the appeal, any party facing a termination, or considering a termination, would do well to bear in mind the lessons of this case.

Facts

The Contract was a services agreement dated 30 September 2011 originally between Armada and Apache Energy Ltd (Apache). 

Woodside acquired the Balnaves field from Apache in 2015 and as part of that acquisition Julimar was novated to be a party to the Contract in lieu of Apache, effective 16 April 2015. 

Julimar (the incoming party) considered that Armada was failing to perform the Contract and this led to its purported termination.  In particular:

  • Armada’s obligations under the Contract included to ensure that various “Acceptance Tests” were completed by the FPSO Facility.
  • One of those was the Operational Endurance Test (OET) which (as at 2015) still had not been passed.
  • Julimar issued a Notice of Entitlement dated 25 September 2015, to Sumitomo Mitsui Banking Corporation (Sumitomo) (a Singaporean entity who was the lead financier to Armada) outlining Julimar could terminate the Contract following Armada’s failure to satisfy the OET.
  • The parties entered a Moratorium Agreement dated 22 January 2016, whereby it was agreed no further Acceptance Tests would be performed.
  • Julimar issued a Notice of Termination dated 4 March 2016 to take effect on 3 April 2016. Julimar nominated Armada’s failure to pass the OET as the reason for termination.
  • On 11 March 2016, Armada claimed Julimar had repudiated the Contract by its purported termination, and that Armada relied on this repudiation to itself terminate the Contract.

Issues

Primary issue: had there been an election to affirm the Contract such that Julimar could not terminate?

Armada accepted that by 9 February 2015, Apache (Julimar’s predecessor party before novation) had the contractual right to terminate the Contract for cause pursuant to Article 10.3(xiii), by giving 30 days’ notice to Armada.

The central issue identified by the Court was whether Julimar (or its predecessor, Apache) had at any time elected to affirm the Contract by conduct after 9 February 2015.

Secondary issues

In addition to this issue two other secondary issues arose.  However, it was accepted that if Julimar’s purported termination for cause by its notice of 4 March 2016 was effective, evaluation of the secondary issues would not be necessary.

Secondary issue A: was Armada itself ready, willing and able to perform at the time of the termination?

The first of the secondary issues was whether Armada was ready, willing and able to perform the Contract by satisfactorily completing the OET at 4 March 2016 (when Julimar attempted to terminate the contract) and 11 March 2016 (when Armada attempted to terminate the contract).

This issue was relevant because, as a matter of law, a party that sues for damages following a valid termination must still demonstrate that it was itself ready, willing and able to perform its key obligations under the Contract at the relevant time.

Secondary issue B: did Julimar have a separate common law right to terminate the Contract?

The further subsidiary issue that arose was whether Julimar also held a common law right to terminate the Contract on 4 March 2016 for either a breach of an essential term of the Contract or by reason of Armada’s repudiatory breach of the contract.  This issue arose as Julimar sought to rely on the common law right to terminate in the alternative to its contractual right.

Decision

Primary issue: whether Apache/Julimar had elected to affirm (so as to lose the right to terminate)

As noted above, Armada contended that Apache and Julimar had elected to affirm the Contract after February 2015 such that by the time that Julimar purported to terminate for cause under the Contract in March 2016, Julimar had lost that contractual right.  This was in reliance on an asserted legal principle that a right to terminate for a given breach will be lost if the party holding the right to terminate elects to affirm the contract rather than terminate it.

Kenneth Martin J ([289]) considered that for Armada’s claim to be successful Armada had to clearly demonstrate that Apache or Julimar:

  • “had been confronted with and needed to make a choice as between inconsistent positions… under the [Contract]”) ('the confrontation issue');
  • “had lost, by reason of delay or otherwise after 9 February 2015, its right to terminate for cause under Article 10(xiii) of the [Contract]” ('the delay issue'); and
  • “had, by its conduct, communicated to Armada an abandonment of the contractually acquired right to terminate for cause under Article 10(xiii)” ('the communication issue').

Kenneth Martin J provided a summary of the Court’s findings ([381]) as follows:

As to the confrontation issue – On the facts, there was never a point which required Apache or Julimar to choose whether to terminate or continue with the Contract.

As to the delay issue – There was no relevant delay by Apache or Julimar when issuing a Notice of Termination for cause under Article 10.3(xiii) of the Contract on 4 March 2016. It was not unreasonable for Julimar to hold off until then before issuing its Notice of Termination.

As to the communication issue – There was no relevant conduct by Apache or Julimar communicated to Armada post 9 February 2015 and before 4 March 2016 indicating they either abandoned the Contract or the right to terminate the Contract.

Accordingly, the Court found Julimar’s termination notice of 4 March 2016 to be valid and effective. There had been no wrongful repudiation or breach of Contract by Julimar and Armada held no right to loss of bargain damages against Julimar. 

The Court’s approach is consistent with earlier authorities to the effect that:

  • merely to act in a way that is consistent with the contract being on foot is not the same as electing to affirm the contract, and such conduct may be done while reserving a right to terminate (Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd [2019] NSWCA 185, [86] per Bell P);
  • generally, a party has a reasonable period of time to exercise a right of termination (Donau, [99]-[101]).

Secondary issues (assuming Julimar had not been entitled to terminate)

While the Court’s finding on the primary issue made consideration of the secondary issues unnecessary, Kenneth Martin J went on to provide his Honour’s views on those issues.

Secondary issue A: whether Armada was itself ready, willing and able to perform

The Court considered that Armada was not ready, willing or able to perform when Julimar or Armada sought to terminate the Contract or when the Notice of Termination came into actual effect (3 April 2016). It was noted that the FPSO Facility had not satisfactorily completed the relevant acceptance tests (the OET) at any time.

Further, throughout October 2015 to February 2016, Armada was found to have been uncooperative and less than forthright in its communications with Julimar in relation to the acceptance testing.

His Honour found that Armada had wrongly insisted that it had passed the acceptance testing in circumstances where it knew it had not – conduct which was repudiatory ( [490], [664]).

His Honour concluded Armada was neither ready, willing, or able to able to perform the OET as the Contract demanded ( [665]). 

This finding was significant because, even if Julimar had wrongfully terminated, Armada (by its lack of readiness, willingness and ability to perform key obligations the Contract at the relevant time) would be disentitled from being able to claim substantial damages (at [409], [411], [666]-[668]).

This approach is consistent with prior case law, such as Gilligan’s Backpackers Hotel & Resort Pty Ltd & Anor v Mad Dogs Pty Ltd [2016] QCA 304, [18]-[20], applying Foran v Wight (1989) 168 CLR 385; [1989] HCA 51.  In Foran, Brennan J put the principle in these terms (at p424):

Where a party claims to be entitled to rescind an executory contract on account of the other party’s repudiation (whether by way of anticipatory breach or incapacity), the first party must show not only the other’s repudiation but his own readiness and willingness up to the time of rescission to perform his essential obligations under the contract [….].

Secondary issue B: whether Julimar had a common law right to terminate 

Julimar had contended that, even if it did not have a contractual right to terminate at the time of its termination, it nonetheless had a common law right of termination existing independently of the Contract.

Julimar was able to run this alternative argument since the Contract made it clear that the contractual rights of termination did not exclude any common law rights of termination.

Kenneth Martin J held Julimar had a common law right to terminate the Contract on 4 March 2016 on two bases:

  • first, the Contract requirement for Armada to pass the Acceptance Tests in a timely fashion was an essential term of the Contract, and Armada was in a continuing breach of that term ([671]-[694]);
  • alternatively, Armada’s wrongful conduct with respect to Acceptance Tests (and reporting on that testing) amounted to a repudiation of the Contract.

The end result

The end result was that Armada’s claims around termination of the Contract wholly failed.