\n| WESTERNZAGROS LIMITED<\/td>\n | Respondent\/Defendant<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n – – – – – – – – – – – – – – – – – – – – –
\nMr Rhodri Davies QC (instructed by Edmonds Marshall McMahon) for the Appellant
\nMr Gavin Kealey QC, Mr Thomas Sprange QC & Ms Ruth Byrne (instructed by King & Spalding LLP) for the Respondent
\nHearing dates: 19th<\/sup> December 2017
\n– – – – – – – – – – – – – – – – – – – – –
\nJudgment Approved<\/p>\nOrder at foot of this judgment<\/strong><\/p>\nLord Justice Longmore:<\/strong><\/p>\nIntroduction<\/strong><\/p>\n\n- This appeal turns on the true construction of a clause in an agreement for consulting services of 23rd<\/sup> April 2006 (\u201cthe CSA\u201d) whereby the claimant and appellant Monde Petroleum S.A. (\u201cMonde\u201d) agreed to provide services to assist the respondent Westernzagros Ltd (\u201cWZL\u201d) in obtaining an oil Exploration and Production Sharing Agreement (\u201cEPSA\u201d) with the Kurdistan Regional Government (\u201cKRG\u201d).<\/li>\n
- An important background to the CSA was that at the material time (as accepted by Monde\u2019s expert in Iraq law) it was a matter of debate whether it was the KRG or the Federal Government of Iraq (or both) that had the power or the authority to grant concessions, such as the EPSA in Kurdistan.<\/li>\n
- Monde is a British Virgin Islands company run by Mr Yassir Al-Fekaiki. Mr Al-Fekaiki is a British national of Iraqi origin, whose father was, until his death in 1997, a prominent Iraqi politician and one of the leaders of the opposition to Saddam Hussain.<\/li>\n
- WZL is a Cypriot-registered company with its headquarters in Calgary, Canada. Until late 2007, it was a wholly-owned subsidiary of Western Oil Sands Inc (\u201cWOSI\u201d), a Canadian oil and gas company whose principal business was an oil sands project in Athabasca, Alberta.\u00a0 In 2007, WZL was \u201cspun out\u201d of WOSI and became the sole asset and a 100% subsidiary of Western Zagros Resources Limited, a Canadian.<\/li>\n<\/ol>\n
Factual background<\/strong><\/p>\n\n- In the period following the fall of Saddam Hussein\u2019s regime, the KRG sought investment in the oil and gas industry from multi-national companies with experience of oil exploration and production.<\/li>\n
- In early 2006, WZL was attempting to negotiate an EPSA with the administration of the KRG, with a view to exploring for oil and developing oil production in that province of that region of Iraq.<\/li>\n
- On 23rd<\/sup> April 2006, WZL and Monde agreed the CSA under which services were to be provided by Mr Al-Fekaiki which were intended to assist WZL to conclude its EPSA negotiations successfully. Monde\u2019s reward for these services was to take the form of monthly fees, success fees payable on the achievement of certain specified milestones, and an option to acquire (in certain events) a 3% working interest in the EPSA.\u00a0 That option was to vest only upon the occurrence of the final milestone.<\/li>\n
- On 4th<\/sup> May 2006, an EPSA was executed between the KRG and WZL, but was never formally ratified by the KRG. Over the following months, the KRG required amendments to be made.\u00a0 Those amendments had the effect of reducing WZL\u2019s contract area from 3,700 km to 2,120 km, and of revising the fiscal terms to make them more favourable to the KRG and less favourable to WZL.\u00a0 An amended and restated EPSA was executed on 26th<\/sup> February 2007 and was formally ratified by the KRG a few days thereafter.<\/li>\n
- On 8th<\/sup> November 2006, Mr Hatfield of WZL sent to Mr Al-Fekaiki of Monde a \u201cclean signed copy of the CSA as requested\u201d. That copy bore a fresh signature page with a new signature by Mr Frangos (an executive of WZL), and incorporated in typescript manuscript amendments which had been made to the 23rd<\/sup> April 2006 version.\u00a0 There were, however, no other changes from 23rd<\/sup> April 2006 version.\u00a0 In particular, no change had been made to the date or to the provisions of Article 10 of the CSA relating to its term and termination.<\/li>\n
- On 16th<\/sup> March 2007 WZL served a Termination Notice on Monde, intending to bring the CSA to an end. On 18th<\/sup> April 2007 WZL and Monde executed a Termination Release Agreement (\u201cthe Termination Agreement\u201d).\u00a0 Under the Termination Agreement, in consideration of the payment by WZL of US$ 700,000 (a sum to which Monde asserted it was already contractually entitled), Monde agreed that the CSA was at an end, and WZL and Monde released each other from all further liabilities.\u00a0 It is common ground that, at that point, Monde\u2019s 3% option under the CSA had not vested.<\/li>\n<\/ol>\n
The Dispute<\/strong><\/p>\n\n- In proceedings brought in the Commercial Court Monde claimed that its signature to the Termination Agreement was procured by misrepresentation and\/or economic duress.\u00a0 On that basis, Monde sought to set aside the Termination Agreement and\/or to claim damages, asserted that the Termination Notice was invalid and that, by serving it, WZL committed a repudiatory breach of the CSA, entitling Monde to substantial damages for the loss of its rights under the CSA, including its 3% option.<\/li>\n
- WZL denied making any misrepresentations or exercising any duress to procure the Termination Agreement. WZL also said that, even if Monde were to succeed in its claims relating to the Termination Agreement, Monde would be unable to prove any or any substantial loss because, on WZL\u2019s case, the Termination Notice was itself effective to bring the CSA to an end, or (if that be wrong) WZL would have been entitled to serve a further such notice.\u00a0 In either event, no further payments would have become due to Monde under the CSA, and Monde\u2019s 3% option would never have vested.<\/li>\n
- The judge held (among many other things) that the Termination Agreement had been procured by misrepresentation but that Monde could not prove any loss following from the because WZL was at all times entitled to terminate the CSA on notice thus ensuring that Monde would never have been in the position to exercise its 3% option.<\/li>\n<\/ol>\n
The CSA<\/strong><\/p>\n\n- Relevant terms of the CSA are:-<\/li>\n<\/ol>\n
\u201c10. TERM<\/u><\/p>\n 10.1 Subject to the provisions of this Article 10, this Agreement shall be effective for a period of 4 months from the effective date hereof.<\/p>\n 10.2 Notwithstanding section 10.1, this Agreement shall continue if the EPSA is executed within 4 months from the date hereof or, if the EPSA is not executed, at the election of [WZL], provided that this Agreement and the option contemplated in Schedule \u201cC\u201d (the Option) may be terminated by [WZL] upon thirty days\u2019 notice to [Monde] should the EPSA not become fully operational and enforceable within six months from the date hereof.\u00a0 If this Agreement is continued as set out above, on the 1 year anniversary of this Agreement it shall terminate with respect to the payments contemplated in Schedule \u201cB\u201d, unless mutually extended for 1 year terms.<\/p>\n 10.3 Notwithstanding the provisions of Section 10.1 and 10.2 above, this Agreement and the Option may be terminated:<\/p>\n (i) by [WZL] upon thirty days\u2019 advance written notice to [Monde] if it becomes manifestly apparent that an operational and enforceable EPSA in form and on terms acceptable to [WZL] cannot be concluded;<\/p>\n (ii) by either party immediately in the event the other party commits a material breach of this Agreement which remains uncured after the period for curing specified in the notice of the breach has expired;<\/p>\n (iii) by mutual written agreement of the parties;<\/p>\n (iv) by election of [WZL] on the termination of the EPSA; or<\/p>\n (v) by [WZL] if it is manifestly apparent that achievement of the milestones set out in Schedule \u201cB\u201d are being achieved primarily as a result of activities of third parties\u201d<\/p>\n \n- Schedule B detailed the payments Monde was to receive under the CSA. It detailed the set monthly payments and also three potential success fees which became payable on completion of three relevant milestones.\u00a0 Those were:-<\/li>\n<\/ol>\n
\u201c(c) Success fees as follows:-<\/p>\n \n- US$ 550,000 upon commencement of the Seismic Program … following signature of the EPSA and associated agreements … or 2 months after the signature by all appropriate parties of the EPSA, whichever comes first;<\/li>\n
- US$ 550,000 following completion of the first 250 kms of the Seismic Program and within one month of the EPSA becoming effective, i.e. passed into law by the Unified Government of Kurdistan, whichever comes last; and<\/li>\n<\/ol>\n
iii)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 US$ 600,000 following completion of the first 500 kms of the Seismic Program and within one month of [WZL] receiving a signed copy of the Confirmation and Support Letter of the Government of the Republic of Iraq (substantially in the form attached in Schedule \u201cD\u201d or a letter having the same effect) acknowledging the EPSA, all to the satisfaction of [WZL].\u201d<\/p>\n The final sentence of Schedule B stated that \u201cthe Option shall only vest upon the events described in (c) above having occurred.\u201d<\/p>\n The Issues<\/strong><\/p>\n\n- There are only two issues on which permission to appeal has been given:-<\/li>\n
- whether the phrase \u201cfully operational and enforceable\u201d in respect of the EPSA in clause 10.2 means (as Monde contends) that it was sufficient that the Unified Government of Kurdistan (or in other words the KRG) had ratified the EPSA (or passed it into law); or (as WZL contends) that all the Schedule B milestones had to be passed including the receipt of a signed copy of the letter of the Government of the Republic of Iraq as referred to in (c)(iii) and Schedule D referred to in the milestones; and<\/li>\n
- whether, in the event that WZL became entitled to serve a 30 day notice pursuant to the proviso in clause 10.2, such notice had to be given immediately or could be given at anytime while there was no \u201cfully operational and enforceable\u201d EPSA.<\/li>\n
- The deputy judge held that the EPSA was not fully operational and enforceable until such time as the Government of Iraq had signed a letter confirming the ESPA and that there was no requirement that WZL should give notice of termination immediately.<\/li>\n
- Monde now appeals both those conclusions. It also sought permission to allege that the notice of termination had to be given, if not immediately, then within a reasonable time of the six month date specified in the clause.\u00a0 The six month period expired on 23rd<\/sup> October 2006.\u00a0 Monde wanted to argue that WZL\u2019s termination notice of 16th<\/sup> March 2007 was served well after any reasonable period had expired.<\/li>\n
- Monde needed permission to serve a supplementary skeleton and (in our view) permission to amend the notice of appeal. In the course of the argument, for reasons we then gave (mainly because the question of reasonableness could have been, but was not, addressed in the evidence and submissions below), we refused permission.<\/li>\n<\/ol>\n
\u201cFully operational and enforceable\u201d EPSA<\/strong><\/p>\n\n- I take first the meaning of \u201cfully operational and enforceable\u201d in clause 10.2. It is not the first reference to a fully operational and enforceable EPSA because the very first clause of the CSA provides that Monde agrees to perform \u201csuch services described in Schedule A to [the CSA] as [WZL] shall request\u201d.\u00a0 The first sentence of Schedule A says that Monde will advise and assist WZL in concluding and maintaining a \u201cfully operational and enforceable\u201d EPSA between the KRG and WZL.\u00a0 It is not, therefore, sufficient that the end object of the assistance should be an EPSA which cannot be fully enforced or cannot be fully operated.\u00a0 The phrase must have the same meaning in clause 10.2 as in clause 1.1 with its incorporation of Schedule A.<\/li>\n
- The judge held that in circumstances, in which Monde\u2019s expert in Iraqi law accepted that the KRG and the Federal Government of Iraq had differences of view as to the extent of the KRG\u2019s authority to grant exploration and production agreements in relation to Kurdistan and that the issues whether KRG was entitled or had the authority to enter into such agreements and even whether the KRG owned the oil fields in Kurdistan at all had not been decided \u201cappropriately to the acceptance of all the political players\u201d, mere ratification of the EPSA by the KRG did not render the agreement \u201cfully operational and enforceable\u201d. For that to be the case both the KRG and the Federal Government of Iraq had to be, as the deputy judge put it in para. 307 of his judgment, \u201conside\u201d.\u00a0 The only way that was going to happen was a documented consent to the EPSA on the part of the Iraqi Government in some such form as expressly contemplated by the third milestone in Schedule B (c)(iii) and that had not happened.<\/li>\n
- The deputy judge also relied on the further context in which the CSA had been agreed which was that several companies seeking concessions in Kurdistan had required similar letters from the Federal Government and that Mr Al-Fekaiki had stated that he was \u201cvery confident\u201d than an appropriate letter from the Federal Government could be obtained within 6 months.<\/li>\n
- Mr Rhodri Davies QC for Monde submitted:-<\/li>\n
- the deputy judge read into the words \u201cfully operational and enforceable\u201d a requirement that a letter in the form required by Schedules B and D had to be in existence when there was no warrant for making such an implication;<\/li>\n
- the deputy judge construed the phrase by reference to the subjective intention of WZL that it wished to have such a letter in place from the Federal Government of Iraq;<\/li>\n<\/ol>\n
iii)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 the deputy judge speculated that unidentified parties might in the future (after the CSA was agreed) claim that entitlements of WZL under the agreement could not be enforced or operated.\u00a0 The phrase could not be construed in the light of some subsequent political impediment; and<\/p>\n \n- the deputy judge had fallen foul of the first factor stipulated in the judgment of Lord Neuberger of Abbotsbury PSC in Arnold v Britton<\/u> [2015] A.C. 1619, 1628 namely that commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which is to be construed.<\/li>\n
- None of those submissions is a fair criticism of the deputy judge, who recorded (para 295), Monde\u2019s submission before him that the phrase \u201cfully operational and enforceable\u201d should be interpreted as meaning, in the words of the second milestone set for payment of the second success fee in Schedule B of the EPSA, \u201ceffective i.e. passed into law by the Unified Government of Kurdistan\u201d. He also recorded WZL\u2019s submission\u00a0 that it made much better sense, in the light of the uncertainties mentioned above, for the words \u201cfully operational and enforceable\u201d to refer to the third milestone of the Confirmation and Support Letter of the Government of Iraq.\u00a0 He rightly recorded the difference between the parties as being simply whether the relevant milestone was the second or third milestone in Schedule B.\u00a0 It was in that context that the judge said (para 308) that the CSA contained its own \u201cimplied definition\u201d of \u201cfully operational and enforceable\u201d.\u00a0 But the parties had accepted that the critical words referred to a<\/u> milestone; it was only a question of deciding which milestone was applicable.\u00a0 It is not therefore a case of the judge wrongly reading words into the phrase \u201cfully operational and enforceable\u201d; it was merely a question of what the words mean in the context of the agreement read as a whole and the judge was entitled to use the phrase \u201cimplied definition\u201d without being guilty of reading words into the contract which were not there.\u00a0 After all, if the parties had meant \u201ceffective\u201d they could have used that word.<\/li>\n
- Nor is it correct to say that the judge construed the critical phrase by reference to the subjective intention of WZL that it wished to have a letter from the Government of Iraq. The judge merely said (para 307) that WZL was not interested in a legal or political wrangle but wanted to get on with the business of exploring for, and then extracting, oil.\u00a0 For that to happen, WZL needed both the KRG and the Iraqi Government \u201cto be onside\u201d.\u00a0 This is not to construe the contract according to the subjective intention of one party but is construing the contract against the uncontested background of political reality.\u00a0 That is an entirely permissible exercise.\u00a0 As Mr Gavin Kealey QC for WZL put it, the letter from the Iraqi Government was not just desirable; it was practically required.<\/li>\n
- Nor can I read the judgment as indulging in impermissible speculation about future events. It is rooted fairly and squarely in the commercial and political background which existed at the time when the contract was made.<\/li>\n
- Nor is it right to say that the judge undervalued the importance of the language of the contract by invoking commercial common sense and surrounding circumstances in contravention of the first factor emphasised in Arnold v Britton<\/u>. It has been axiomatic, since at least Reardon Smith Line Ltd v Yngvar Hansen-Tangen<\/u> [1976] 1 WLR 989, 995-7 that any commercial contract must be construed against its commercial background or, as Lord Wilberforce put it, in its \u201cfactual matrix\u201d (997C).\u00a0 That is what the deputy judge did.\u00a0 In a case in which it was accepted that some words (reflecting a relevant milestone) had to be read into the phrase \u201cfully operational and enforceable\u201d and it was only a question of which milestone was being referred to, it was entirely legitimate for the judge to choose the one which made more commercial sense, in the context of the situation existing at the time the contract was made.<\/li>\n
- Mr Davies also submitted, in line with Monde\u2019s original skeleton argument that since Schedule C provided that Monde\u2019s option could be exercised 24 months from the commencement of the Seismic Program, as described in Article 4.1 of the EPSA, (or on the declaration of first commercial discovery if earlier), it was contemplated that the seismic programme would be in operation for as long as 24 months; that showed that the EPSA was operational. As long as it could be enforced against the counter-party the KRG, it was also enforceable.\u00a0 It was thus \u201cfully operational and enforceable\u201d at the time WZL purported to terminate the EPSA, as confirmed by Monde\u2019s expert Mr Chalabi.<\/li>\n
- As Lord Justice Singh observed in argument, however, that submission is inconsistent with Mr Davies\u2019s acceptance that the phrase \u201cfully operational and enforceable\u201d has to be interpreted by reference to one of the milestones in Schedule B. Nor does it give any effect to the word \u201cfully\u201d.<\/li>\n
- I would therefore reject the first ground of appeal.<\/li>\n<\/ol>\n
Requirement for immediacy?<\/strong><\/p>\n\n- I turn then to the second ground of appeal that any notice of termination served by WZL must be served \u201cimmediately\u201d upon the expiry of the six months given by the proviso in clause 10.2, not some 5 months later.<\/li>\n
- This is a hopeless contention. The clause merely provides that WZL may terminate \u201cshould the EPSA not become fully operational and enforceable within 6 months from the date of the EPSA\u201d.\u00a0 No requirement of immediacy is expressed and there is no reason for it to be implied.\u00a0 The idea that, if notice is not given immediately, WZL should be locked into the agreement until such time as it can show within the terms of clause 10.3 that it has become \u201cmanifestly apparent that an operational and enforceable EPSA … cannot be concluded\u201d would be highly un-commercial.<\/li>\n
- There can, moreover, be no obvious prejudice to Monde by WZL leaving the position open because WZL takes the risk that a letter of consent from the Iraqi Government will in fact materialise. If it does, it would then be too late to serve a termination notice and Monde will have achieved the third milestone as set out in Schedule B.\u00a0 A deferred notice can therefore potentially benefit Monde without causing them any prejudice.<\/li>\n
- Mr Davies submitted that, if the right to terminate was not exercisable but carried on indefinitely, that meant that clause 10.3(i) was redundant; that sub-clause enables WZL to terminate \u201cif it becomes manifestly apparent that an operational and enforceable EPSA on terms acceptable to WZL cannot be concluded\u201d. But that sub-clause gives a further right to WZL which is by no means inconsistent with the right to terminate if a fully operational and enforceable EPSA is not forthcoming within 6 months of the CSA.\u00a0 It sets a higher hurdle for the first 6 months of the contract and is an understandable provision in a contract for oil exploration in a politically uncertain part of the world.<\/li>\n
- It was also said that it was un-commercial to construe the contract in a way that meant Monde continued to be bound, while WZL was able to exercise its right to terminate whenever it wished. But as I have already pointed out, the continuance of the contract until any termination could in fact work to Monde\u2019s advantage if it did procure the letter from the Government of Iraq which Mr Al-Fekaiki had always expected to be able to do.<\/li>\n
- On the basis therefore that the only options before the court are to construe clause 10.2 as requiring WZL to exercise its right to terminate immediately on the six month anniversary of the CSA and otherwise forfeiting that right, or as giving WZL the right to terminate it at a time of its own choosing, I would unhesitatingly pronounce for the latter and uphold the deputy judge\u2019s decision to that effect. It would, of course, be a different matter if WZL had affirmed the contract after the right to terminate had arisen but WZL did not do so.<\/li>\n<\/ol>\n
Conclusion<\/strong><\/p>\n\n- I agree with the deputy judge on both matters on which permission to appeal has been given and would, therefore, dismiss this appeal.<\/li>\n<\/ol>\n
Lady Justice Hallett:<\/strong><\/p>\n\n- I agree.<\/li>\n<\/ol>\n
Lord Justice Singh:<\/strong><\/p>\n\n- I also agree.<\/li>\n<\/ol>\n
ORDER<\/strong><\/p>\n____________________________<\/strong><\/p>\nUPON <\/strong>the hearing of the Appellant\u2019s appeal in this matter<\/p>\nAND UPON HEARING Mr Rhodri Davies QC<\/strong> on behalf of the Appellant and Mr Gavin Kealey QC on behalf of the Respondent<\/p>\nIT IS ORDERED THAT<\/strong>:<\/p>\n\n- Permission for the Appellant to rely on a supplementary skeleton argument is refused.<\/li>\n<\/ol>\n
\n- The Appellant\u2019s appeal is dismissed.<\/li>\n<\/ol>\n
\n- The Appellant do pay the Respondent\u2019s costs of and occasioned by the appeal, to be assessed if not agreed. Appellant to pay the respondent US$150,000 on account of such costs.<\/li>\n<\/ol>\n
\n- Interest on costs shall accrue from the date of this Order at the judgment rate<\/li>\n<\/ol>\n
\n- Liberty to apply to the Commercial Court as to directions with regards to monies held in Court as security for costs.<\/li>\n<\/ol>\n
Date:\u00a018th<\/sup> January 2018<\/p>\n |