Joint Operating Agreements: What have we learned from the High Court’s decision in TAQA v Rockrose

Bryan Cave Leighton Paisner
Contact

Summary

On Friday 17 January 2020, the High Court gave its judgment in the TAQA Bratani v Rockrose case (TAQA Bratani Ltd and others v. RockRose UKCS8 LLC [2020] EWHC 58 (Comm)).

In this judgment, the Court held in favour of the claimants that an express term giving the non-operators the right to remove the Operator pursuant to the joint operating agreement (JOA) did not imply any duty on the non-operators to act in good faith when exercising this right.

This is a key development for oil & gas practitioners and sets an important precedent on the removal of operators and the principles of contract interpretation. It is also a further case on the vexed question of if and when the English court will imply a duty of good faith into commercial contracts and what can constitute a relational contract.

Background

TAQA Bratani, JX Nippon Explorations and Spirit Energy Resources (the “Non-Operators” or “Claimants”) were party to four JOAs and an unitisation and unit operating agreement (the “Brae JOAs”) alongside the operator, Marathon Oil (“Marathon”), that governed the operation of five oil and gas field blocks in the North Sea (the “Brae Fields”).

The Brae JOAs allowed for the removal of the operator by: (i) resignation; (ii) immediate termination in the event of one of a number of specified events taking place; or (iii) the unanimous vote by the Non-Operators on not less than 90 days’ notice.

Following the sale of Marathon to RockRose, the Non-Operators voted unanimously to remove Marathon as operator of the Brae Fields and subsequently gave Marathon 365 days’ notice of its termination as operator.

Marathon challenged the termination of its operatorship on the basis that the absolute power to remove the operator was subject to various implied terms that qualified the situations where the Claimants could use their termination right. Marathon claimed that the Brae JOAs were ‘relational contracts’, i.e. contracts that govern long term relationships to which the parties make a substantial commitment, and consequently, the Claimants owed Marathon a duty of good faith.

Conversely, the Non-Operators argued that their right to terminate Marathon’s operatorship was an absolute right that was not subject to any implied terms requiring them to act in good faith, regardless of whether the contract was a relational one.

Judgment

Contractual Construction

His Honour Judge Pelling QC first considered the general principles applicable to contractual construction, and noted that agreed commercial terms must be interpreted in their natural and ordinary meaning taking into account the other relevant provisions of the contract and commercial common sense, and should disregard any subjective interpretation of a party’s intention unless absolutely required for clarity or to give the contract business efficacy.

In reaching this conclusion, His Honour Judge Pelling QC applied Arnold v Britton [2015], where it was held that the natural meaning of a provision should not be rejected because one party is unwise to have agreed to the term, as it is not the function of a court to relieve a party from a bad bargain when interpreting a contract.

In determining whether there were any implied terms in the Brae JOAs that could qualify the operator termination provision, the Court applied Marks and Spencer v BNP [2015] in which it was held that in detailed commercial agreements, as with the Brae JOAs, terms should only be implied if they are necessary to give the contract business efficacy or are so obvious that it goes without saying that the parties would have agreed to the apparent implied term if it had been suggested at the time of the contract.

His Honour Judge Pelling QC emphasised that the Brae JOAs were sophisticated and professionally drawn and negotiated agreements between well-resourced parties and their legal advisers, so where issues are not resolved in these types of agreements, it is generally more likely to result from choices made by the parties as opposed to drafting errors.

The Court therefore found that, in applying the above principles, the operator termination provision was clear and unambiguous and conferred an unqualified right for the Non-Operators to discharge Marathon from the role of operator. Furthermore, had the parties intended to qualify the termination right relied on by the Claimants, they would have expressly done so – having noted that other provisions of the Brae JOAs did expressly refer to good faith.

Relational Contracts

Relational contracts are ones which govern long term relationships of trust under which there is a substantial degree of commitment from all parties. The effect of this, under common law, is that the courts are more likely to imply a duty of good faith into the contract. However, whilst the Court considered that a JOA has certain attributes of a  ‘relational contract’, it held that this did not necessarily imply any duty on the parties to act in good faith when dealing with each other, including in enforcing any term of the Brae JOAs to terminate Marathon’s role as operator. This was because:

  1. the right to remove the operator was an absolute and unqualified right;
  2. it would be impermissible to imply a term that qualified what the parties had agreed between them; and
  3. it would be wrong to imply a term when the contract works as the parties had intended it to work.

Conclusions

While there is nothing surprising or new in the court’s application of the principle of contractual interpretation, there are some important conclusions we can draw from this case:

  • The decision demonstrates the Court’s reluctance to imply terms into contracts, especially for complex agreements between sophisticated parties, where the provisions are otherwise clear;
  • Whilst JOAs often expressly state that the parties don’t intend to create any partnership or quasi-partnership, it may still be deemed a ‘relational contract’. However, this does not necessarily imply any duty on the parties to act in good faith when dealing with each other. The law in this area continues to develop;
  • This case gives a fascinating insight into the various commercial tensions that exist between operators and non-operators (and the risk of these becoming public when parties litigate). We discovered that in assessing whether to terminate Marathon’s position as operator, the Non-Operators’ main considerations were:
    • whether Rockrose (to whom Marathon was being sold) could meet the financial obligations to which it would be subject; and
    • more importantly, whether Rockrose had the necessary experience to operate the Brae Fields effectively and cost efficiently. In this respect, we heard how TAQA had been concerned about the cost implications of the forthcoming decommissioning of the Brae Fields and had forecast that it could save the parties around half a billion GBP through its own appointment as operator. This was a key consideration of the Non-Operators in deciding to remove Marathon as operator.
  • His Honour Judge Pelling QC went on to discuss, at the request of the parties, whether the conduct of the Non-Operators would have breached a duty of good faith had one been applied. It was held that none of the Non-operators would have breached any duties of good faith as, whilst they acted in their own interests, they had not done so at the expense of the other parties. The reason for this was that if TAQA, after taking over as operator, was successful in reducing the decommissioning costs of the Brae Fields, this would have benefitted all the parties to the Brae JOAs, including Marathon, showing that TAQA was acting for the benefit of the parties as a whole.

Whilst the Court’s decision may be appealed, this judgment is key in understanding the principles of contractual interpretation and the implied duty of good faith in JOAs. Operators in particular should take note of the apparent ease to which their operatorship may be terminated.

However even on a wider scale, practitioners regardless of industry and area of expertise should carefully consider the implications of express terms and whether they are in fact clear and unambiguous. The best way to ensure a provision is subject to a duty of good faith is to explicitly say so in the contract!

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bryan Cave Leighton Paisner | Attorney Advertising

Written by:

Bryan Cave Leighton Paisner
Contact
more
less

Bryan Cave Leighton Paisner on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.