Armada v Woodside Energy: Steps to validly terminate a contract

There’s nothing worse than a bad relationship, particularly when a commercial relationship breaks down.

Often, parties enter into long-term contracts to fulfil a project or performance of specified work. The contract should regulate the working relationship between the parties and clearly set out their respective rights, obligations and duties (particularly around timing of performance).

But what happens when this relationship sours or performance is not up to the agreed specification?

In such instances, parties will often seek to come to some sort of commercial resolution, perhaps even re-negotiate the terms of the agreement, or in extreme situations, attempt to extract themselves from the contract and cancel the agreement.

However, it is widely accepted in law that termination of a contract may only be invoked in specific (express, or repudiatory) circumstances, and often, courts will prefer to uphold the terms of a contract and push for performance rather than termination, particularly where it is alleged that, despite the alleged breaches, the breaches have been waived and/or the contract has been ‘affirmed’.

How then does one terminate a contract ‘for cause’ on performance grounds?

The case of Armada Balnaves Pte Ltd v Woodside Energy Julimar Pty Ltd (2022) WASCA 69 (Armada case) is a good example of the steps that need to be taken by a party who wishes to withdraw themselves from a contract in order to avoid the risk of ‘wrongful repudiation’.     

Background

On 24 June 2022, the Court of Appeal Western Australia delivered its judgment in the Armada Balnaves Pte Ltd (Armada) and Woodside Energy Julimar Pty Ltd (Woodside) saga. The appeal was dismissed and the decision of the Supreme Court of Western Australia on 24 January 2020 was upheld. This puts to rest a case which initially began in March 2016 when a dispute arose between Armada and Woodside for alleged breach of a services agreement (Services Agreement) relating to the floating production storage and offloading (FPSO) vessel, Armada Claire, based in the Balnaves gas field (Balnaves field), off north-western Australia since August 2014.

The relevant contract was a wholly written Services Agreement at 30 September 2011, originally between Armada and Apache Energy Ltd. The Services Agreement was then novated in favour of Woodside on 21 May 2015 (Novation Agreement). The purpose of the contract was remuneration for offshore oil extraction services using the converted FPSO over a minimum services term of four years. The Services Agreement provided, in general terms, for the conversion work to be undertaken by Armada at the Keppel Shipyard in Singapore, and for the FPSO to be tested at sea at the Balnaves field.

The testing, required to be undertaken by Armada at the Balnaves field, included certain tests collectively called the 'Acceptance Tests', one of which was an 'Operational Endurance Trial' (Endurance Trial). Practical Completion, as defined in Article 4.11 of the Services Agreement, required Armada to successful complete the Acceptance Tests, which they did, except for the Endurance Trial.

The dispute

The origin of the dispute arose out of an alleged wrongful repudiation by Woodside, who, on 4 March 2016, delivered a notice of intention to terminate Armada based on Armada’s failure to complete the Acceptance Tests and provide satisfactory performance of the Endurance Trial under article 4.11 of the Services Agreement. Armada filed a statement of claim in the Supreme Court of Western Australia claiming damages as a result of the alleged wrongful repudiation for $275.8 million plus an additional $7.7 million for work done and materials supplied to the FPSO.

Importantly, Article 10.3 provided that in certain specified events, Woodside would have the right to terminate the Services Agreement by giving Armada 30 days’ written notice. One of the specified events, in Article 10.3(xiii), concerned the non‑performance of the Acceptance Tests.

The Endurance Trial (also called the '72‑hour test') was described under clause 10.6(b) of Annexure B - Scope of Work. Essentially, the Endurance Trial included an obligation on Armada to demonstrate that the process plant is able to operate continuously with all equipment and machinery operating within their manufacturer’s design parameters, for a period of 72 hours.

On 6 September 2015, the first Endurance Trial was undertaken by Armada at the FPSO – it was not successful due to, amongst other issues, the repeated shut-down of the facility’s gas compressors. Further attempts at the Endurance Trial took place a few days later, these also failed. A further Endurance Trial was conducted from 13 to 16 September 2015, with various issues noted by Woodside in what it described as 'punch list' items in a draft document dated 24 September 2015.

On 25 September 2015, Woodside issued a notice to Sumitomo (Armada’s financier), with a copy to Armada, identifying that a termination event (being the continued failed completion of the Endurance Trial) had occurred under the Services Agreement (the LQE Notice).

In November 2015, two further Endurance Trials were attempted without success. On 27 November 2015, Woodside sent a letter to Armada, advising that if the failure to perform the Acceptance Tests was not cured within 120 days after the date of the issuance of the 25 September LQE Notice (i.e., effectively by 22 January 2016), Woodside reserved the right to immediately terminate the Services Agreement.

In early to mid‑January 2016, Armada proposed doing a further Endurance Trial on specified terms, but following correspondence between the parties during this period, the proposed trial was never undertaken. On 22 January 2016, a 'Moratorium Agreement' was entered into, in which Armada agreed, in effect, not to seek to perform or execute any further Acceptance Tests over a period of further negotiations which extended from 22 January 2016 to 5 February 2016, and, in practical terms, thereafter until 26 February 2016.

Despite this, the Endurance Trial had not been satisfactorily performed by March 2016. On 4 March 2016, Woodside issued a termination notice to Armada, according to Article 10.3(xiii) of the Services Agreement. On 11 March 2016, Armada informed Woodside that it was 'accepting' Woodside's termination notice as a repudiation of the Services Agreement by Woodside. On 3 April 2016, the 30‑day period specified in Woodside's termination notice expired.        

Armada sued.

The principal issues in the primary proceedings were, in broad terms and in summary:

1. whether, by the date of Woodside's Termination Notice, Apache/Woodside had affirmed the Services Agreement and whether, accordingly, Woodside had no contractual right on 4 March 2016 to terminate the Services Agreement for cause under Article 10.3(xiii) for failure to successfully perform the Endurance Trial part of the Acceptance Tests within six months of being ready for first oil (RFFO). In respect of this issue, there was no dispute as to the underlying facts as relied on by Armada, only as to the inferences to be drawn from the facts
2. whether, irrespective of any contractual right to terminate under Article 10.3(xiii), Woodside had common law rights to terminate on 4 March 2016, whether for breach by Armada of Article 4.11 as a time‑essential term or as an intermediate term, or for repudiation by Armada arising from its communications and in the circumstances concerning its failures to satisfactorily complete the Endurance Trial
3. if Woodside were disentitled from terminating the Services Agreement, whether Armada, for the purposes of its claim for damages, was ready, willing and able to perform the Services Agreement as from March/April 2016
4. Armada's claim for loss of bargain damages.

On appeal, the court had to consider multiple grounds of appeal brought by Armada, these were:

• ground 1: Armada contended that the court of first instances erred in finding that, on the proper construction of the Services Agreement and the proper characterisation of the admitted conduct (by Armada and Woodside), the termination right conveyed by Article 10.3(xiii) of the Services Agreement was not lost, (1) by an election to affirm or, (2) otherwise, by failing to exercise it within a reasonable time. Armada's contention was that, in the circumstances and on the proper construction of the Services Agreement, the right to terminate under Article 10.3(xiii) had been lost by reason of that right having not been exercised (by Apache prior to novation or by Woodside after novation) within the period 9 February 2015 to 25 September 2015, and/or by reason of Woodside having entered into the Novation Agreement on 21 May 2015
• ground 2: Armada contended that the court of first instance erred in finding that, on the proper construction of Article 4.11 of the Services Agreement, and in the events which happened:
  • Armada was required to perform the Acceptance Tests, including the Endurance Trial, at the 'earliest practical opportunity'
  • Article 4.11 was a condition making time of the essence, the breach of which entitled Woodside to terminate at common law
  • Alternatively, Article 4.11 was an intermediate term, the breach of which was so serious as to entitle Woodside to terminate at common law.
• ground 3: Armada contended that the court of first instance erred in finding that Armada repudiated the Services Agreement by failing to pass the Endurance Trial, and evincing an attitude that it was unwilling to perform the Services Agreement as it saw fit
• grounds 4(a), 4(b) and (c): Armada contended that the court of first instance erred:
  • in law in finding that Armada was not ready, willing and able to perform the Services Agreement by asking the wrong question – whether Armada, then and there (in March/April 2016), was capable of performing the Endurance Trial – when the correct question was whether Armada was capable of contractually performing its obligations (including the Endurance Trial) when the time for performance became due
  • in law in applying the wrong test for the quantification of damages (ground 4(b))
  • in law and in fact in relation to the court’s assessment of the probabilities, which ought to be attributed to the possible ways the Services Agreement could hypothetically have been performed for the purposes of calculating Armada's damages (ground 4(c)).

The Court of Appeal’s decision

In arriving at its decision, the Court of Appeal found the following:

1. the court of first instance erred, with respect, in finding that Woodside had not lost the right to terminate under Article 10.3(xiii) by reason of the doctrine of election
2. the court of first instance erred, with respect, in finding, in effect, that Article 4.11 was a time‑essential term entitling Woodside to terminate on 4 March 2016, and in finding that Article 4.11 was an intermediate term which, in the circumstances, justified the termination for delay on 4 March 2016
3. whilst the court of first instance's finding on repudiation based on alleged incapacity cannot be sustained, the court did not err in finding repudiation in the sense of renunciation by Armada.  Nor did the court err in finding that Armada had not established that, on 11 March 2016, it was willing to perform an Endurance Trial in accordance with the contract. The Court of Appeal stated that on these bases alone, the appeal should be dismissed
4. the court of first instance did not err in principle in considering that the question of Armada's readiness, willingness and ability to perform an Endurance Trial should be addressed with reference to performance in/around April 2016.  The Court of Appeal also remarked that the relevant date for performance of a further Endurance Trial (on the assumption that Woodside had not established a right to terminate) was 15 April 2016
5. in assessing the evidence on the question of readiness and ability, the court of first instance, with respect, made certain errors which, it is to be inferred, materially influenced the court’s conclusion that the evidence as a whole was unreliable. If the appeal were not otherwise dismissed because of the conclusions referred to in point three above, the Court of Appeal stated that there would need to be a re-trial on the question of Armada's readiness and ability to perform the Services Agreement otherwise in accordance with the reasons based on such errors
6. considering the way Armada presented its case at trial, Armada did not establish any, or at least any material, error of law, in relation to the quantification of damages
7. insofar as the court of first instance found that Armada had not established that Woodside would have terminated for convenience, no error was established with respect to that finding.

Accordingly, the appeal court dismissed the matter as Armada had not established any, or at least any material, error in law insofar as the court of first instances was concerned, and concluded that Armada’s conduct amounted to a repudiation by renunciation of the Service Agreement and furthermore, that Armada had not established willingness to perform the Endurance Trial in accordance with the Services Agreement on the relevant date.   

Conclusion

The Armada case brings into focus the circumstances when a contract may be terminated as well as the careful steps which need to be followed in order to ensure that a contract is cancelled validly.

It also highlights the possible repercussions if proper steps are not followed to validly terminate a contract by discussing the risk of repudiation and the circumstances in which it may be successfully replied upon, or in this case not, as a remedy against a party seeking to get out of a contract.     

If you have any questions about your contracts, please contact us below or send us your enquiry here.

Authors: Geoff Farnsworth & Michael Tatham

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Geoff Farnsworth

Michael Tatham

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