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Joint Operating Agreements - High Court Finds Express Contractual Right to Remove Operator At Will Is Absolute

Rig-Universal

In a recent decision, TAQA Bratani Limited & Ors v RockRose UKCS8 LLC [2020] EWHC 58 (Comm), the English High Court held that an express contractual right in a joint operating agreement for non-operators to remove the operator at will was “absolute” and that the exercise of such a right by the non-operators was “not subject to any implied constraint”, including any implied duty of the non-operators to act in good faith. The decision will clearly be of immediate interest to operators and non-operators engaged in joint oil and gas operations in the UK Continental Shelf (UKCS) and internationally, where the English law JOA governing their relationship includes a similar provision.

His Honour Judge Pelling QC in his judgment has also provided a valuable summary of the English law principles of contractual interpretation and the recent case law on the concept of good faith, in particular. TAQA v RockRose will therefore be of wider commercial interest to anyone negotiating, drafting, or interpreting JOAs or other long-term contracts governed by English law given the recent debate as to whether English law JOAs might be considered ‘relational’ contracts and, if so, whether they are subject to an implied obligation of good faith.

THE FACTS

The claim in this expedited trial was brought by TAQA Bratani Limited, TAQA Bratani LNS Limited, JX Nippon Exploration and Production (U.K.) Limited, and Spirit Energy Resources Limited (the “Participants”). The Participants are parties with non-operated interests to four joint operating agreements and a unit and unitisation operating agreement (together, the “JOAs”) in respect of the Brae Fields located in the UK sector of the North Sea. The operator of the Brae Fields until 1 July 2019 was called Marathon Oil UK LCC (“MOUK”), a wholly owned subsidiary of Marathon Oil Corporation. On 1 July 2019, RockRose Energy Plc (“RR Plc”) completed the acquisition of 100% of the share capital in MOUK, following which MOUK was re-named RockRose UKCS8 LLC (“RRUK”).

On 6 June 2019, the Participants voted unanimously to (i) terminate MOUK’s (subsequently RRUK’s) appointment as operator under each of the JOAs, and (ii) appoint TAQA as the successor operator. The reasons for the Participants voting to remove MOUK as operator are outside the scope of this article, but included the Participants’ perceiving certain financial and operational risks of MOUK remaining operator after it had been acquired by RR Plc. By way of further background, a previous dispute between the Participants (less JX Nippon) and MOUK culminated in the January 2019 Court of Appeal decision in Spirit Energy Resources Ltd & Ors v Marathon Oil UK LLC [2019] EWCA Civ 11, which case was analysed by Vinson & Elkins in this article.

In voting to remove MOUK as operator, the Participants relied on the following clause in each JOA (or a clause that is materially similar):

19.1 Operator may be discharged; (a) at the end of any calendar month by the Operating Committee giving not less than 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; […]”

On 20 June 2019, the Participants served notices under each JOA giving MOUK 365 days’ notice of termination of its role as operator. On 3 July 2019, MOUK was re-named RRUK. For the reasons set out further below, RRUK claimed the Participants’ notices were invalid and of no effect. The Participants sought declarations from the Court that the notices were valid and took effect in accordance with their terms.

THE LEGAL ARGUMENTS

The ‘Braganza doctrine’ and an implied duty of good faith?

RRUK did not dispute that the Participants had exercised the relevant contractual procedures correctly to remove it as operator under each of the JOAs. However, RRUK argued that the notices served by the Participants were invalid and of no effect on the basis that the termination provision within each JOA:

  • was not an unqualified right and was subject to various implied terms – in particular, RRUK relied on the decision of the UK Supreme Court in Braganza v BP Shipping Limited [2015] UKSC 17 that implied a term to qualify the manner in which a contractual discretion is exercised, requiring the absence of arbitrariness, capriciousness, perversity and irrationality (the ‘Braganza doctrine’); and/or
  • was subject to qualifications to similar effect arising from the mutual trust, confidence and loyalty said to arise in long-term joint venture and similar ‘relational’ agreements (to which some previous court decisions have suggested an obligation of good faith may apply). In this regard, RRUK asserted that throughout TAQA had been motivated “solely or mainly by a desire to take over the Operator role for its own commercial and financial purposes”.

Or an express and unqualified right to terminate?

The Participants argued that the termination provisions in the JOAs created an express and unqualified power to terminate and not a contractual discretion in the sense that was considered in Braganza v BP Shipping. As a consequence, Braganza and similar authorities were not applicable. The Participants also asserted that, although the JOAs may be ‘relational’ or long-term agreements, there are no special rules of interpretation or implication that apply to such agreements. As a consequence, JOAs are to be construed as all other contracts, and terms can be implied into them only by applying conventional principles of English law.

THE HIGH COURT DECISION

Applying the English law principles of contractual interpretation

The Court found that the terms on which the Participants relied were not subject to any implied constraint as alleged by RRUK. HHJ Pelling QC considered the existing, well-established English law principles of contractual interpretation as applied to the terms of the JOAs and concluded that:

  • the language used by the parties in the JOAs was “clear and unambiguous” and the only qualifications in respect of the termination provision were (i) qualified voting majorities (i.e. getting the required number of non-operators to support the decision at OpCom), and (ii) the minimum period of notice. Clause 19.1(a) of the JOAs was therefore “an unqualified right conferred on [the Participants] by the bargain of the parties”;
  • the language used elsewhere in the JOAs emphasises that the parties intended the provision to have the effect of giving the non-operators an unfettered right to remove the operator. HHJ Pelling QC noted, “This shows that where a right is intended to be unqualified it is simply described as a right without express words that emphasise that the right is an unqualified right.

Implied terms, the ‘Braganza’ issue and the ‘relational contracts’ issue

The Court accepted that there are circumstances in which terms can be implied into commercial agreements and noted this was an “incrementally developing area of law,” but rejected RRUK’s argument that an unqualified contractual right can be constrained by an implied term qualifying the manner in which it may be exercised by reference to Braganza (which dealt with the exercise of a discretion, not a straightforward right).

The Court noted 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 – and to do so would have “profound implications for English commercial and contract law”.

On the ‘relational contracts’ issue, the Court did not decide whether JOAs are ‘relational contracts’, but held that even if they are, that does not mean it is necessary to imply an obligation of good faith. Here, the JOAs had expressly provided a right to remove the operator, and the Court held it would be wrong to imply an obligation of good faith which would qualify that contractual right. HHJ Pelling QC specifically highlighted the comment in Yam Seng Pte Ltd v International Trade CorpLtd [2013] EWHC 111 (QB) (the 2013 Court decision that triggered the debate surrounding good faith and ‘relational contracts’) that the implication of a duty of good faith is not “a reflection of a special rule of interpretation for this category of contract.” Finally, the Court concluded there is nothing in the JOAs that creates for an incumbent operator a vested right to continue as operator that it is entitled to maintain other than with the consent of the other parties to the relevant JOA.

COMMENT

The High Court decision in TAQA v RockRose is significant as English court decisions in respect of the interpretation of rights and obligations under JOAs remain a rarity. The judgment is the latest in a slowly growing body of English case law on the rights of operators and non-operators engaged in joint operations in the oil and gas sector. Increasingly, the disputes giving rise to such cases have arisen against the background of new investors acquiring interests in mature oil and gas assets and infrastructure in the North Sea which is likely, in our view, to lead to further disputes as operators and non-operators alike look more closely at the question of whether existing arrangements and practices are maximising value.

This decision will provide clarity to operators and non-operators that rights under an English law governed JOA are unlikely to be subject to implied terms that fetter the parties’ decision making where that is not expressed in the JOA itself. The decision is also an important statement from the courts that the concept of good faith will not easily be implied into a JOA even where it may be considered ‘relational’, bringing welcome clarity to an area that has been the subject of recent debate.

Additional Information

JOAs normally provide for a right for non-operators to remove the operator in prescribed circumstances, for example: on operator insolvency; where operator has committed, and failed to remedy, a material breach of its JOA obligations; or where operator’s participating interest falls below a certain threshold. Many JOAs that are in effect today will also contain a right for the non-operators to remove the operator at will, though this will depend on the model form adopted by the parties and whether they have elected to include such a right:

  • the Association of International Petroleum Negotiators (AIPN) model form JOA published in 2012, the most widely used of all model form JOAs internationally, contains an optional provision that non-operators may vote to remove the operator “at any time without cause” – the required number of non-operators and voting threshold are negotiated;
  • the current model form JOA published in 2009 by Oil & Gas UK (OGUK – the trade body for the UK offshore oil and gas industry) does not include such a right to remove the operator at will. However, earlier model forms used for UKCS joint operations did include such a provision – including the 1977 model form JOA published by the British National Oil Corporation (BNOC – the UK’s erstwhile NOC), which we understand from the judgment in TAQA v RockRose to be the basis for the Brae Fields JOAs, with some significant variations; and
  • as the terms of a JOA are clearly negotiated agreements, the parties to a JOA may nonetheless choose to include such a right to remove the operator at will. Non-operators in negotiating a JOA may regard the mere presence of such a right as sufficient to temper the behaviour of the operator. In practice, however, including such a provision in a JOA (or enforcing one that already exists) can be impractical as (i) a change of operator normally requires the consent of relevant government authorities – the approval of the Oil & Gas Authority (OGA) in the case of UK, and (ii) the incumbent operator may be the only JOA partner to possess the necessary technical expertise and resources to manage the joint operations.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.