Monde Petroleum SA v Westernzagros Ltd

Contractual language must be construed in the context of the agreement as a whole and its commercial and factual background. Commercial common sense may assist in identifying the coherent meaning of an agreed contractual phrase, but cannot undervalue the words used. Where a phrase refers to a contractual milestone, the court must identify the applicable milestone from the agreement and its context. In a politically uncertain concession arrangement, “fully operational and enforceable” required more than local ratification where wider governmental authority remained contested. A termination right triggered by failure to achieve that condition within a stated period need not be exercised immediately unless the contract so requires. It remains exercisable while the condition remains unsatisfied, subject to any subsequent affirmation of the contract.

Monde Petroleum SA appealed from a decision of Mr Richard Salter QC, sitting as a Deputy High Court Judge in the Commercial Court. The judge found that a termination agreement had been procured by misrepresentation, but held that Monde could prove no loss because Westernzagros Ltd was entitled to terminate the consulting services agreement and the related option would never have vested.

Permission to appeal was granted on two construction issues: whether an exploration and production sharing agreement became “fully operational and enforceable” upon ratification by the Kurdistan Regional Government or only upon the further governmental confirmation contemplated by the agreement; and whether a termination notice had to be served immediately after six months had elapsed.

The Court of Appeal unanimously dismissed the appeal. Lord Justice Longmore gave the leading judgment, with Lady Justice Hallett and Lord Justice Singh agreeing.

1. Meaning of “fully operational and enforceable”. The phrase had to bear the same meaning in the termination clause as in the agreement’s services provision and Schedule A. The parties accepted that it referred to one of the milestones in Schedule B. The issue was whether that meant the second milestone, involving effectiveness or ratification by the Unified Government of Kurdistan, or the third milestone, involving a confirmation and support letter from the Government of Iraq.
2. The commercial and political background was relevant. The authority of the Kurdistan Regional Government to grant the concession was contested, and Westernzagros required both the regional and federal governments to be onside before the agreement could be fully operated and enforced. The court therefore upheld the construction requiring the third milestone. This did not involve adding words to the contract, relying on subjective intention, or speculating about later events. It was a construction of the agreement as a whole against its factual matrix, consistently with the principles discussed in Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 and Arnold v Britton [2015] A.C. 1619.
3. Timing of termination. The clause contained no express requirement that notice be served immediately after six months. No such requirement should be implied. Westernzagros could serve notice at a time of its choosing while the EPSA remained not fully operational and enforceable. Delay could benefit Monde because a later governmental confirmation would prevent a termination notice being served and would enable the third milestone to be achieved.
4. The separate termination right arising when it became manifestly apparent that an operational and enforceable EPSA could not be concluded was not redundant. It imposed a distinct and higher threshold. The court noted that affirmation of the agreement after the termination right arose would produce a different result, but Westernzagros had not affirmed the agreement. Permission to advance a reasonable-time argument was refused. The appeal was dismissed, with costs payable by Monde, including US$150,000 on account.

• Court of Appeal (Civil Division) — [2018] EWCA Civ 25: unanimously dismissed the appeal and upheld the deputy judge’s conclusions on both contractual construction issues.
• High Court, Queen’s Bench Division, Commercial Court — Mr Richard Salter QC, sitting as a Deputy High Court Judge, held that the EPSA was not fully operational and enforceable until the Government of Iraq had provided the relevant confirmation, and that termination notice need not be given immediately.