Recent court ruling - Implied duty of good faith
In relational contracts, such as an oil and gas Joint Operating Agreements (JOA), do non-operators owe an implied duty of good faith in respect of their express powers, and an implied duty not to act irrationally?
The High Court recently answered this question on 17 January 2020, in its judgment in the case of TAQA Bratani Limited and others, when the Court ruled that no such implied duties existed and that the non-operating parties under JOAs had the absolute right to remove the operating party on the minimum notice specified in the JOAs.
Details of the case
The case concerns JOAs in place between TAQA Bratani Limited, TAQA Bratani LNS Limited, JX Nippon Exploration and Production (UK) Limited, Spirit Energy Resources Limited (the Claimants and non-operating parties) and RockRose UKCS8 LLC (the Defendant and operating party) in relation to the Brae Fields in the North Sea.
In July 2019, RockRose acquired the original operating party under the JOAs, Marathon Oil, and renamed it RockRose UKCS8 LLC. Details of the proposed acquisition had been announced previously in February 2019.
In June 2019, the non-operating parties served notice to terminate the appointment of RockRose as operator under the JOAs, relying on the following express provision in the JOA:
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.
RockRose argued that the termination was invalid, notwithstanding the fact that the non-operators had correctly followed the contractual procedure for termination. RockRose contended that despite the provisions of the JOAs, the non-operators were subject to an implied duty of good faith.
The High Court rejected RockRose’s primary argument that the non-operators owed RockRose an implied duty of good faith, namely that a party must exercise a contractual discretion in good faith and not arbitrarily or capriciously. That argument relied on the principles set out by the Supreme Court in 2015 in the case of Braganza -v- BP Shipping Limited and another. The High Court, while stating that JOAs were arguably relational contracts, also rejected RockRose’s second argument that the non-operators’ power to terminate the JOAs was qualified by the implied duties said to arise in relational contracts, namely that the performance of such a contract is based on mutual trust, confidence and expectations of loyalty.
Instead, the High Court found in favour of the non-operators, determining that ‘The express terms within the JOAs on which the [non-operators rely] were provisions that on their true construction conferred an absolute right on the non-operator participants in the joint ventures to which they applied to discharge the operator on the minimum notice specific in the JOAs’ and that ‘the terms on which the [non-operators] rely are not subject to any implied constraints’.
The High Court’s starting position was to consider the significance and intent of the language used in the JOAs and the express terms, which in this instance conferred an unqualified right on the non-operating parties to terminate the JOAs in accordance with Article 19.1. Furthermore, the High Court also determined that the alleged duty of good faith, arising from the Braganza case, did not apply in circumstances were there were unqualified termination provisions in a complex commercial agreement between sophisticated commercial parties.
Practical tips and how Clarion can help
This decision in the TAQA Bratani case highlights the fundamental principle that parties, under English law, are free to negotiate and enter into contracts on such terms that they choose. Accordingly, if parties wish to have any powers or obligations qualified by any duty of good faith, or otherwise, appropriate terms should be negotiated and set out in the contract.
While each case will turn on its facts, the TAQA Bratani case provides a useful indication as to how the courts in England will interpret JOAs and how they will approach any arguments regarding implied terms as to good faith, particularly where the intent of the JOA is clear and the terms have been expressly negotiated between the parties.
Our expert team at Clarion can provide a tailored service and guide businesses on all commercial aspects of JOAs, including related disputes, litigation, arbitration, expert determination and mediation.
If you have any questions relating to this article, this case, JOAs in general, or our expertise in energy disputes, please do not hesitate to contact with David Williams, Partner, on +44(0)113 227 3602 or at email@example.com
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