English Disputes in the Oil & Gas sector: JOAs, implied terms and good faith revisited

At our English Disputes in the Oil & Gas sector conference in November 2019, the OGA spoke about collaboration and co-operation, and James Howells QC (Atkin Chambers, London) talked about JOAs, relational contracts and the extent to which good faith may be implied into contracts as a matter of English Law.

A number of days after our conference, the High Court revisited both of those themes in Taqa Bratani Limited and Others v Rockrose UKCS8 LLC [2020] EWHC 58 (Comm) in a case which is likely to be of interest to operators and those considering purchasing operator stakes, as well as those drafting contracts generally in the industry.

We summarise below what happened in the case, followed by what we think the implications of the decision will be.

Background

The case arose from a joint venture among four parties to extract oil and gas from the Brae Fields in the North Sea.

Prior to 1 July 2019, the four parties to the Joint Operating Agreements (JOAs) and Unit Operating Agreement (collectively, “the JOAs”) were: Marathon Oil UK LLC (“MOUK”), Taqa, JX Nippon and Spirit. MOUK was the Operator.

Each JOA contained a clause dealing with the discharge of an Operator. The clauses were similar (albeit not identical) and one of those read:

“Clause 19.1 Operator may be discharged; (a) at the end of any calendar month by the Operating Committee giving not less that ninety (90) days notice to it, provided that in respect of any vote of the Operating Committee on any such discharge under this Article 19.1(a) the voting interest of the Participant which is the Operator and the voting interest of any Participant which is an Affiliate of the Operator shall be ignored and the required percentage figure shall be One hundred per cent (100%) of the total votes available to the remaining Parties; or..”

On 1 July 2019, Rockrose (the Defendant) acquired the entire issued share capital of MOUK.  Taqa, JX Nippon and Spirit (the Claimants) maintained that they had concerns about the performance of MOUK prior to the sale, and of Rockrose following the sale, to perform the role of Operator under the JOAs - both from an operational and a financial perspective.  That led the Claimants to vote to terminate MOUK’s appointment as Operator under the JOAs, and they later sought declarations from the court that the notices were valid.

The Claimants argued that the JOAs provided them with an unqualified right to terminate the JOAs.

Rockrose argued that the purported termination of its role as Operator was invalid and of no effect because either on a true construction of the termination clause it was not an unqualified right or that it was subject to various implied terms which had the effect of qualifying the circumstances in which the Claimants could exercise the right to terminate.

Decision

Express terms – interpretation

The court held that the clauses relied upon by the Claimants were intended to confer an unqualified right to terminate the Operator.  The judge considered that the express terms of the contract were clear and unambiguous. In particular, there was no qualification within the clause itself as to the exercise of the right to discharge the Operator. All that was required, provided that the required numbers of non-operator participants supported the decision to discharge, was the giving of a minimum period of notice. The judge referred to the decision as a “binary one – either the non-operator participants decide to discharge or they don’t”. No evaluation or adjudication required to be undertaken before they were entitled to take that decision.

The court gave specific examples of other provisions within the JOAs which referred to the concept of good faith and therefore took the view that had the parties intended the right to terminate clause to have been qualified, they would and could have said so expressly.

The court went on to say that the unqualified right to discharge the Operator was consistent with the common understanding of the parties as to the nature of their relationship. The relationship was not a partnership and parties were entitled to vote at meetings among them in accordance with their own best interests. There was nothing within the JOAs that gave MOUK a vested right to remain as Operator other than with the consent of the other parties to the relevant JOA.

Having also considered the factual and commercial context, the judge concluded that there was nothing that suggested that the conclusions reached by the court were wrong and that a different view of the construction of the contract should have been taken.

Implied terms

Business Efficacy

The court also considered whether the express provision dealing with the discharge of an operator was in any way qualified by an implied term. The court held that it was not. In reaching that view, the judge considered that it was not necessary to imply any of the terms contended for by Rockrose to give business efficacy to the JOAs or in order to give effect to what was so obvious, it went without saying.

The Braganza doctrine

Rockrose sought to rely upon the Supreme Court’s decision in Braganza v BP Shipping to argue that a decision maker’s discretion will be limited by concepts of “honesty, good faith and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality.”

However, the court held that the doctrine has no application in unqualified termination provisions within expertly drawn commercial agreements between sophisticated commercial parties. Judge Pelling QC stated: “…where the parties choose to include within their agreement a provision that entitles one or more of the parties to terminate the agreement between them, that clause takes effect in accordance with its terms.”

Judge Pelling QC also stated that: “Absolute rights conferred by professionally drawn or standard form contracts including but not limited to absolute rights to terminate relationships and roles within relationships are an everyday feature of the contracts that govern commercial relationships and extending Braganza to such provisions would be an unwarranted interference in the freedom of parties to contract on the terms they choose, at any rate where there is no fiduciary relationship created by the agreement…”

Relational Contracts

Rockrose also sought to argue that the JOAs were “relational” contracts which resulted in the implication of a term requiring the parties to deal with each other in good faith. In doing so, Rockrose relied upon Yam Seng Pte v International Trade Corp.

Judge Pelling QC was prepared to treat the JOAs as being at least arguably relational contracts as they governed long-term relationships to which the parties make a substantial commitment and which may require a high degree of communication and co-operation. However, the judge was not prepared to accept that treating the contract as such led to the conclusion that it was necessary to imply a good faith obligation into the exercise of power. The judge took the view that (i) on a true construction of the JOAs, the power to discharge an operator was “an absolute and unqualified power”; (ii) it is impermissible to imply a term that qualifies what the parties have expressly agreed between them; and (iii) it would be “wrong” to imply such a term because “it is not necessary in order to make the contract the parties have chosen work as it is to be presumed they intended it to work, or, to the extent there is any difference, to give effect to their presumed common intention.”

Judge Pelling QC noted that Rockrose had placed significant reliance upon a document issued by the OGA namely: “The Maximising Economic Recovery Strategy for the UK” (“MER”), which was published in 2016. The judge noted that it post-dated, by a number of years, the JOAs, which were under consideration and could not therefore result in terms being implied into an agreement entered into years earlier.

Expert Evidence

The court also heard evidence from an expert in relation to whether there was an industry practice supporting the implication of the terms as argued by Rockrose, but it was found that there was no such industry practice that qualifies what is otherwise not qualified and further, that a party exercising a right to discharge does not require to explain why they have done so.

Breach of Implied Terms alleged by Rockrose

Although it was not necessary in light of his decision, Judge Pelling QC was asked to decide whether the Claimants would have been entitled to act as they did, had the right (to discharge the Operator) been qualified as was argued by Rockrose. A substantial part of the judgment is devoted to this issue.  The evidence given on the factors taken into account by each of the Claimants was analysed at some length. Ultimately, the judge reached the view that had there been terms implied into the JOAs, as alleged by Rockrose, the Claimants would not have been in breach of them.

Implications

The termination clause at the focus of this judgment was not necessarily standard, however the judgment offers important insight into: (i) how the court will interpret contract provisions (and in doing so it referenced a number of significant recent decisions in this regard including Arnold v Britton, Rainy Sky SA v Kookmin Bank, Wood v Capita Insurance Services and Marks and Spencer plc V BNP Paribas Securities Services Trust); and (ii) steps that could be taken by those drafting contracts to minimise the prospect of additional terms being implied by a court at a later stage.

It will also serve as:

• A warning to those purchasing Operator stakes to consider the contractual provisions with the other joint venture parties and when they can be triggered; and
• A reminder (given the number of internal emails and documents from Taqa and Spirit quoted in the decision) that non-privileged pre-litigation communications often do not remain private following a disclosure process in English litigation.