Joint Operating Agreement (JOA) Provisions And Default: A Focus On Forfeiture, Withering, And Other Compensating Schemes

Default Provisions in JOAs

In an unincorporated joint venture, the Joint Operating Agreement (JOA) serves as the legal framework for operations is, with the exception of the License, the most essential legal document for oil activities on the continental shelf of the United Kingdom (UKCS). Essentially, it serves as an overall framework for partners in the oil and gas business to "jointly develop a perspective and share responsibilities and profits of exploration and development".[1] The cost-intensive existence of oil and gas production necessitates that parties make significant contributions both during the exploratory, appraisal, or development stages and only during the decommissioning phase. Failure to make timely contributions by any of the stakeholders may result in unanticipated expenses by non-defaulting parties (NDP), delays, as well as the withdrawal of the venture.[2] The danger of default grows dramatically as a result of regulatory changes as well as the arrival of smaller businesses into established oil and gas zones like the UKCS. A default provision in JOAs is examined in this paper with a particular focus on forfeiture in the UKCS.

Although commentators have underlined the broad scope of default as per the UKJOA, default in this context relates to the failure or recurrent delays in proportionally providing monies in response to cash demands by the Operator by the specified deadline. In light of the fact that default has a negative impact on the profitability of the whole JV, JOAs include clauses that layout explicit punishments for defaulters as well as commensurate duties for the NDPs.[3]

Forfeiture is the most common default provision, however other compensating schemes, such as withering provisions, buyback clauses, or liens, might interact or be substituted. Defaulters' personal information (PI) is subject to forced acquisition by NDPs at a reduced cost under buyback terms in their contracts. Excellent illustration: As per the Model UK JOA 2009, defaulters were entitled to market value compensation upon the purchase of their PI by any NDP after an expert appraisal of such interests.[4] Calculating and reallocating the PI of the defaulting party (DP) in relation to its defaults are accomplished using formulae in the withering variation. Despite the fact that such formulae are marketed as 'proportionate' and less unpleasant, the intricacy and discussion required to implement such measures represent considerable obstacles for both approaches.

liens/mortgages, each party undertakes a mortgage on its principal investment in the name of the others as collateral for payments needed under the joint venture agreement. In the event of a default, NDPs might foreclose, reclaim the default sum and related fees, and restore any surplus to the Defaulting Party. However, since these mortgages must always be registered in order to be enforced, the cost and complexity of the problems might escalate, and they may be completely ineffectual at the time of decommissioning.[5]

Losses of production rights, as well as the ability to make statements or participate in Operating Committee decisions, are both consequences of a Defaulter's inability to make payment during the grace period, which begins the default process. Most of the time, if a Defaulter does not remedy the situation within a further grace period of 30 or 60 days, the Defaulter forfeits its PI and NDPs gain such rights in accordance with their pre-existing PI. It should be highlighted that, regardless of whether or not the JOA includes a default mechanism, the purpose for incorporating one is to assure the predictability of finances necessary for the life of the joint venture.[6]

Forfeiture as a Default Provision

In the past, forfeiture was used as a way to make sure people did what they were supposed to do, but it wasn't thought about how it would be enforced at the time. The applicability of forfeiture under JOAs inside the UKCS has not yet been challenged, owing to the time-consuming nature of litigation is a significant deterrent to oil and gas corporations. There have, nevertheless, been two key bottlenecks identified: the Rule against Penalty as well as the Anti-deprivation principle, both of which have been considered in parallel economic situations.[7]

The Rule against Penalties is a relic of common law that precludes the execution of any condition in a contract that operates as a punishment against a party who has breached the terms of the contract. This is significant as courts have a tendency to treat forfeiture in the same way they do penalty or liquidated damages provisions. According to Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd [1914] UKHL 1[8], the legal position about what constituted a punishment is unambiguous and unambiguous. According to the Clydebank Case[9], the Court said that penalties are payments made to the person who did something wrong in order to make them afraid. Liquidated damages are payments that are made to the person who did something wrong in order to make them think that they will be harmed. Even though the Court of Appeal found that the agreement had a penalty clause, it did not throw out the case. Instead, it only limited it to the amount that the party lost. This is because the Court of Appeal found that the agreement had a penalty clause. However, it did not throw out the case. Instead, it only limited it to what the party lost.[10]

Furthermore, in the recent decision of Cavendish Square Holding B.V. v Makdessi [2015] UKSC 67[11], the SC made significant revisions to the legal landscape. According to the circumstances of the case, Cavendish had agreed to acquire Makdessi's interests in the firm according to a share/purchase Contract with the company. Among the provisions of the Agreement were non-competition restrictions, as well as a duty on Makdessi's part to safeguard the company's reputation. He was responsible for forfeiting his outstanding $75 million worth of shares (the "forfeiture clause") in the event that he defaulted on his payment obligations (the "withholding clause"). After determining that Makdessi had breached his contractual obligations throughout the trial, the Court had left to evaluate whether both articles were enforceable in light of the prohibition on the imposition of fines. On whether or not a provision was pre-estimation of loss or punitive, the SC noted that damages provisions may be neither nor both, as the SC noted in its ruling.[12] Whether an amount is "unconscionable" and "extravagant" in light of the interests of an innocent party is what decides whether or not a contract's primary duties may be enforced. Secondary obligations are contractual remedies for failing to execute primary obligations. As a result, the court determined that the forfeiture clause was the most important and enforceable provision.

Other Compensating Schemes

Starting with this ruling, it is possible that the courts' resolve to enforce forfeiture clauses in commercial contracts between parties with similar negotiating positions and access to specialised legal assistance, such big oil firms, has been reinforced.

Secondly, the judgement has increased the level of ambiguity around the enforcement of typical forfeiture terms in joint operating agreements (JOAs), since any lawsuit on this subject would likely assess whether the clauses are main or secondary in their application. Comments have emphasised that, according to the court's reasoning, this difference is disjunctive or 'cannot constitute the main duty that is subject to the rule regarding fines since it is in relation to an enforceable default clause.'[13]

Courts have characterised the forfeiture clause as a "secondary duty that only arises upon default and exists exclusively to assure the payment of cash calls, other funds owing, and decommissioning security beneath the JOA," according to Judith Aldersey et al. (2016). As a matter of fact, this divide into main and secondary responsibilities is certain to be perplexing in the writing and enforcement of intricate commercial contracts like the JOA since such difference, "although reasonable, is only appropriate for the rarefied environment of the House Of Lords."[14] But the possibility that compensated sale provisions including such Buyout clauses might be interpreted as primary responsibilities and so immune from being rejected as Penalty remains a realistic possibility.

The Anti-Deprivation rule says that no person who owns property can keep it for himself until he becomes bankrupt, and then make it so that when he does become bankrupt, the property will go to someone else and not to his creditors.[15] When the House of Lords reversed the Court of Appeal's majority ruling in British Eagle International Airlines Ltd v Cie Nationale Air France [1975] 1 WLR 758[16], it ruled that the airline firms' agreement to utilise a clearinghouse plan to manage all debits and credits among themselves was ineffective against the liquidator (British Eagle) and against policymaking, as well as s.302 of the Companies Act's liquidation regulations (s.107 of the Insolvency Act 1986).[17]

Considering the clarity of the policy's meaning, there is still some confusion about how it should be applied, as the court has recently clarified. Perpetual Trustee Co Ltd v BNY Corporate Trustee Services Ltd [2009] EWHC 2953 (Ch)[18] and Butters v BBC Worldwide Ltd [2009] EWCA Civ 1160[19], a security trust deed clause prioritising the payment of a swap counterparty (Lehman) and the occurrence of default events like liquidation, when the primary attention shifted to the noteholders, are two examples of this. BBC had pre-emption authority over Woolworth's interests in the joint venture enterprise, which had been created before to the insolvent Woolworth's bankruptcy. When the COA heard both cases, it found that the principle was inapplicable in both instances. Following an appeal to the SC in regard to the first case, which delineated the limits of the principle (Re Perpetual) and dismissed the appeal, the Court, under the leadership of Lord Collins, stated that the Anti-Deprivation Principle somehow doesn't implement if the deprivation takes place for a purpose other than bankruptcy.[20] After reviewing the relevant precedents, the Court concluded that in "borderline circumstances, a financially rational agreement agreed into in good faith must not be considered to be in violation of the anti-deprivation rule." as 'it is desired that, to the greatest extent feasible, the courts give respect to contractual provisions that have been agreed upon by the parties.[21]

Consequences of Default

Styles have observed that the perspective of the English courts, particularly in light of the perpetual case, suggests that the court may sustain forfeiture provisions in joint venture agreements. Furthermore, it is quite probable that if the forfeiture of the DP participation interest to the NDPs is completed prior to the commencement of any bankruptcy proceedings by the DP, the anti-deprivation principle would not be applicable. However, in cases when this occurs after an insolvency, there is still some ambiguity about how the concept should be applied.[22] Insolvent licensors would have no claim to hydrocarbons in the ground, according to some analysts, since the Oil and Gas Authority may cancel an operational licence in the event of an insolvent licensee.

The right of a Defaulting Party to seek Court relief from forfeiture is another essential concern. According to the Court of Appeal's opinion, a claimant seeking relief must be seeking the loss of proprietary or possessory rights. This relief is only available in commercial transactions and must be invoked by extending the payment time. A JOA's rights are property rights, and hence subject to the court’s equitable discretion, argue a lawyer.[23] In the Cavendish case, the SC held that the Court's judgement in Jobson v. Johnson to vanish down the criminal amount was valid only in the framework of equitable forfeiture. Two things may be derived from this for JOAs. If an equitable remedy entails more than just extending the time within which to fulfil an obligation, a defaulting party is free to seek a court-supervised sale or withering of its interest.[24] The DP has made large payments before defaulting, according to Eduardo and Marianthi, and the court may allow this kind of restitution. Another thing to note is that the SC seems to have tacitly authorised the use of withering clauses, enhancing the possibility of their enforcement. Evidence suggests that courts may refuse to provide relief if time is of the essence. In the context of JOAs, it is possible that time is of the essence. The court may decline to offer relief in the form of an extension of time since the default rules already give the Defaulting party adequate time within which to cure its default.[25]

Conclusion

Forfeiture has been the focus of this study's examination of the enforceability of default clauses in JOAs in the UKCS. After everything that has been said about the enforceability of the default clauses of a JOA, there is still no legal precedent. A paradigm of consistency does not exist in the case law addressing joint oil and gas activities, as Gray and Lee said. Instead of ordinary forfeiture, the intricacy and expense of enforcement of default provisions such as buy-outs, liens and withering clauses may provide major obstacles.

British Eagle International Airlines Ltd v Cie Nationale Air France [1975] 1 WLR 758

Butters v BBC Worldwide Ltd [2009] EWCA Civ 1160

Cavendish Square Holding B.V. v Makdessi [2015] UKSC 67

Clydebank Engineering and Shipbuilding Co. v. Don Jose Ramos Yzquierdo y Castaneda [1905]AC 6)

Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd [1914] UKHL 1

Kilmer v British Columbia Orchard Lands [1913] A.C. 319

Perpetual Trustee Co Ltd v BNY Corporate Trustee Services Ltd [2009] EWHC 2953 (Ch)

Whitmore v Mason (1861) 2 J & H 204

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Gordon G, Paterson J, and U?s?enmez E, UK Oil And Gas Law (Edinburgh University Press 2018)

Jensen B, and Failat Y, 'Oil And Gas Joint Operating Agreements: Default Provisions, A Dilemma By Default' [2013] SSRN Electronic Journal

Mathews C, 'Joint Operating Agreements: Understanding Different Interests And Concerns In The Wake Of Reeder V. Wood County Energy' (Duo.uio.no, 2013) <https://www.duo.uio.no/bitstream/handle/10852/61603/4/Joint-Operating-Agreements-Post-Reeder-CXM-edits-minus-bibliography.pdf> accessed 7 March 2022

Pereira E, and Pappa M, 'The Effects Of Default, Transfer, And Withdrawal Provisions On JOA Exits: Should I Stay Or Should I Go?' [2019] International Energy Law Review

Pereira E, 'Enforceability Of Default Provisions Under Joint Operating Agreements' (HeinOnline, 2018) <https://heinonline.org/HOL/LandingPage?handle=hein.journals/hujil41&div=14&id=&page=> accessed 7 March 2022

Pereira E, Protection Against Default In Long Term Petroleum Joint Ventures (Oxford Institute for Energy Studies 2012)

Taiwo T, 'An Evaluation Of Contractual Clauses Used To Mitigate Risks In Long Term Oil And Gas Agreements' (Etheses.bham.ac.uk, 2019) <https://etheses.bham.ac.uk/id/eprint/10069/8/Taiwo2020PhD.pdf> accessed 7 March 2022

Willoughby G, 'Forfeiture Of Interests In Joint Operating Agreements' (1985) 3 Journal of Energy & Natural Resources Law