In TAQA Bratani Limited and Others v RockRose UKCS8 LLC  EWHC 58 (Comm) the Commercial Court decided that a right of the non-operators to vote to remove an operator 'at will', in a joint operating agreement, was not subject to any implied constraints, including one of good faith. As similar clauses are an option in the AIPN (2012) Model International Joint Operating Agreement and continue to exist in a number of North Sea joint operating agreements, the Commercial Court's decision will be of wide commercial interest to operators and non-operators in the oil and gas industry.
The parties to the dispute are each participants under five joint operating agreements (the "JOAs") governing the operation of the Brae fields in the Central North Sea. There was no material difference between the relevant clauses in the JOAs. Under each of the JOAs Marathon Oil UK LLC ("MOUK") was designated operator.
Change of Operator was governed by express provisions that required:
"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; or
(b) forthwith upon the Operating Committee giving notice to it if:-
(1) a petition in bankruptcy is presented to, and agreed to be heard-by, a bankruptcy court or an order is made, or an effective resolution is passed, for the dissolution, liquidation or winding up of the Operator, other than other than a winding up for the purpose of amalgamation or reconstruction;
(2) the Operator becomes insolvent;
(3) a receiver is appointed for, or an encumbrancer takes possession of, the whole or a major part of the assets or undertakings of the Operator;
(4) the Operator ceases or threatens to cease to carry on its business or a major part thereof or a distress or execution process is levied or enforced or sued out upon or against a major part of the chattels or property of the Operator and is not discharged within fourteen (14) days;
(5) it sells or otherwise disposes of a majority of its Interest in the Contract Area other than to any Affiliate; or
(6) having been deemed by the Operating Committee to be in default in the performance of any term or condition of this Agreement, it fails to commence to remedy such default within ten (10) days after receipt of written notice from or on behalf of the Operating Committee hereto and thereafter fails to diligently proceed to remedy such default; or
(7) having been deemed by the Operating Committee to have failed to carry out its obligations under the Decommissioning Security Agreement in any material respect;
provided that in respect of any vote of the Operating Committee on any such discharge under this Article 19.1(b) 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 set out in Article 6.3 shall be applied to the total votes available to the remaining Parties."
In February 2019, it was announced that RockRose Energy Plc was to acquire MOUK.
In early June 2019, TAQA Bratani Limited, TAQA Bratani LNS Limited, JX Nippon Exploration and Production (U.K.) Limited and Spirit Energy Resources Limited (the "Claimants"), being the entirety of the non-operator participants, voted unanimously to terminate RRUK's appointment as Operator under each of the JOAs, relying on their right to do so under Clause 19.1(a) (and equivalent provisions) of the JOAs.
Notices discharging MOUK as Operator were served in late June 2019. The purchase of MOUK completed in July 2019 and MOUK was subsequently renamed RockRose UKCS8 LLC ("RRUK").
RRUK argued that the express terms (rights) on which the Claimants relied were impliedly qualified by obligations that required the Claimants to not exercise the express powers they relied on capriciously or arbitrarily and only in good faith (either because the JOAs were 'relational contracts' with implied general duties of good faith, or because Braganza type duties were implied) and, in consequence, only in the best interests of the operation of the licence block or blocks in question. Further, the Claimants did not comply with the qualifications for which RRUK contended and in consequence the Claimants' purported notices were invalid and of no effect.
The Claimants' sought declarations as to the validity of their notices.
The Commercial Court considered the starting point in determining the meaning and effect of the JOAs is the language used by the parties because (a) the parties have control over the language they use in a contract; and (b) the parties must have been specifically focussing on the issue covered by the disputed clause or clauses when agreeing the wording of that provision. This is of particular importance with contracts such as the JOAs because they are sophisticated and complex agreements drafted by skilled and specialist professionals. That being so, contracts such as the JOAs are to be interpreted principally by textual analysis unless a provision lacks clarity or is apparently illogical or incoherent.
It was clear that the clauses relied on by the Claimants are and were intended to confer an unqualified right to terminate the Operator role. The Commercial Court's reasons for reaching that conclusion were as follows:
- The language used by the parties is clear and unambiguous – Clause 19 provides that the " … Operator may be discharged … at the end of any calendar month by the Operating Committee giving not less than ninety (90) days notice to it …". There is no qualification within the clause other than that concerning qualified voting majorities.
- If and to the extent it were wrong to conclude that the language used by the parties is clear and unambiguous, the language used elsewhere in the contract emphasises that the parties intended the provision to have unqualified effect. The contrast between clauses 19.1(a) and (b) could not be clearer. The operative words of sub-clause (a) are unqualified whereas those in sub-clause (b) are qualified by the critical word "if" so that the Operator can be discharged under sub-clause (b) upon the Operating Committee giving notice to it if but only if one of the conditions at sub-sub clauses (1) to (7) applies.
- That this is the correct interpretation derives some support from the terms in which the right of an Operator to resign is phrased. It is not suggested that the right to resign is qualified (even though the clause does not in terms say that the right is unqualified). 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. The drafting convention used is only to qualify a right where it is intended that it should be qualified – as is the case with clause 19.1(b). Once this is understood to be the drafting convention adopted the true meaning and effect becomes entirely clear.
- Had the parties intended any qualification on the right to terminate under clause 19.1(a) of the Block 16/7a JOA by reference to the concept of good faith there is no doubt that they could and would have expressly so stated, as is apparent from other provisions within the JOA (which contain express obligations of good faith).
- The inclusion of an unqualified right to discharge the Operator reflects and is consistent with the common understanding of the parties to the agreement as to the nature of the relationship. The relationship was not and was not intended to be a partnership and the parties were fully entitled to vote at operating committee meetings in accordance with what they perceived to be their own best interests.
The Commercial Court also considered 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.
Further, any suggestion of an industry standard practice or understanding, arising from the introduction of the Maximising Economic Recovery for the UK Strategy ("MER UK") or otherwise, that the right to terminate on notice was regarded as qualified was not correct. Indeed, the evidence suggested that the right to terminate on notice was inserted in the historic United Kingdom model forms to enable British National Oil Corporation, as participant, to step in "without reason" if a discovery was made. MER UK could not imply terms into the JOAs because it significantly post-dates the dates of the JOAs.
The United Kingdom model form clauses dealing with the removal of operators in joint operating agreements have evolved over time. The British National Oil Corporation ("BNOC") Proforma Joint Operating Agreement, Fifth Round (1977) (the "BNOC 1977 Model Form JOA") was the prevailing model form at the time the JOAs in question were entered into.That Model Form and the later United Kingdom Offshore Operators Association 2002 Model Form JOA (the "UKOOA 2002 Model Form JOA") each contained a provision to remove the operator 'at will' by a vote of the non-operator participants.
Although the Oil and Gas UK Model JOA (2009) does not include a removal 'at will' provision, many joint operating agreements in the United Kingdom Continental Shelf ("UKCS") pre-date 2009 and are based on the BNOC 1977 Model Form JOA or the UKOOA 2002 Model Form JOA, including provisions that allow the removal of the operator 'at will' by a vote of the non-operators. In addition, the AIPN (2012) Model International Joint Operating Agreement provides an option that expressly allows that removal of the operator at "any time without cause" by a vote of the non-operating participants. As such, the decision of the Commercial Court will have important ramifications on the proper construction and interpretation of many joint operating agreements.
In essence, the Commercial Court has made it clear that where the non-operators have an express contractual right to vote in favour (or against) the removal of an operator without cause, such right is not restricted or fettered by implied terms as to: (1) Braganza type considerations to not exercise the express powers arbitrarily or capriciously and only in good faith or (2) 'relational contract' good faith.
Also, in the United Kingdom, provisions concerning 'collaboration' between joint operating agreement participants in oil and gas legislation and MER UK do not alter parties' pre-existing obligations to each other under joint operating agreements, for example, by requiring the parties to contractually 'collaborate' beyond the express terms of their joint operating agreements.
As a result, the non-operators were entitled to exercise their vote in their own commercial interests – including their own perceived financial benefit from the outcome of that vote – with no obligation to explain or objectively justify that decision. It appears that this case is the first time that non-operator participants have taken the step of discharging an operator in reliance on a contractual right to do so without cause.It remains to be seen whether this was a 'one off' that arose in these very particular circumstances, or whether such situations will become more frequent as the number of participants in the UKCS expands, with new entrants introducing a greater variety of financial structures and drivers, interests and perspectives than the industry has previously seen.
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