Oil & Gas

In our previous blog we focused on Frustration and Force Majeure – the first of four topics covered in the 2017 Contracting Compass series.

The Contracting Compass initiative provides insight on issues of English law relevant to oil and gas contracts and comprises a series of seminars, each accompanied by a dedicated white paper.

Recognising that the landscape of the contract is sometimes difficult to navigate, each seminar and paper highlights a key clause from the contract, focuses on particular points of English law and commercial practice most relevant to the clause concerned, and heightens awareness of the landscape as a whole.

We now turn to a topic we presented last year: Breach of Contract and Remedies.

A breach of contract occurs when one party fails to fulfil or intimates that they do not intend to fulfil, without lawful excuse, an obligation under the contract. In most circumstances this will entitle the other party to a remedy intended to compensate them for the loss suffered as a result of the breach.

When faced with a breach, the first question to ask is whether the breached term is a condition, warranty or innominate term, as this will determine the applicable remedy. Terms can be expressly designated in the contract or by statute. In circumstances where terms are not clearly classified by the contract or by statute, the court may consider the surrounding circumstances to ascertain the intention of the parties in relation to the designation of that term. The table below sets out the remedies available for breach of each type of term:-

Term breached Remedy
Condition/material term Innocent party entitled to terminate and sue for damages
Warranty/immaterial term Innocent party entitled to sue for damages
Innominate term Innocent party entitled to a remedy based on the nature and effect of the breach

 

It is important to exercise caution when considering termination of the contract. The risk if you terminate when you are not entitled to do so, is that the party otherwise in breach may cross claim for wrongful termination, with serious consequences for you.

When drafting the contract, it is worthwhile spending time considering what the effect of breach would be and what approach might be adopted when faced with such breach. In many circumstances, it is not commercially desirable to terminate the contract. That is why it is often useful to include a liquidated damages clause which sets out the consequences of a breach of contract in the form of a fixed amount of damages, or a formula to calculate the amount of damages.

Liquidated damages are legitimate and enforceable so long as their purpose is to protect the innocent party’s legitimate commercial interests and the sum stipulated is not extravagant or unconscionable when measured against those interests. Self-help remedies such as liens and set-off can also be used to good effect without the need to raise proceedings in circumstances where there is no appetite to terminate the contract.

Damages are of course the most common remedy sought for breach of contract. Damages are not intended to be punitive. The general principle is that they are intended to compensate the injured party so as to restore them to the position they were in, but for the breach. Please see our white paper for further details of the elements of a damages claim.

Over the course of 2017, the Contracting Compass seminar series will put three further clauses under the spotlight. The next seminar is 3 May 2017, with the focus of contractual indemnities and warranties. Reserve a space at this event.

Ken MacDonald

Ken MacDonald

Ken is one of Aberdeen's most respected business disputes lawyers with over 20 years experience in Aberdeen of advising clients and representing their interests in all types of commercial litigation.
Ken MacDonald