Recent trends in joint venture disputes in the mining sector

Staying faithful

Global Publication November 2020

Introduction

This article considers the duties, both express and implied, that joint venture (JV) partners may be under when dealing with one another – can a party simply ‘look out for its own’ or does it have to take into account its partners’ interests when conducting JV business? And how do arbitrators approach these questions? 

 

Joint ventures and mining

Joint ventures are a popular tool to share financial and development risk in the mining sector. Junior miners focused on exploration seek to access capital and expertise by teaming up with larger mining companies who need to replace reserves and diversify portfolios but do not want to take on exploration risk. States look to partner with international mining companies in order to have an operational stake in projects and skill up their local workforce. Private equity firms willing to bear short term volatility for long-term returns inject cash into capital-constrained mining companies. 

Whilst JV partners may therefore appear to have a common goal – a successfully operating mine – parties are often entering into these relationships for different strategic reasons and interests can sometimes diverge. JV disputes are common in the industry and take many forms – disagreements about work plans and budgets, challenges to operatorship, defaults for failing to meet cash calls and disputes about offtake arrangements. In an international market, these disputes are typically arbitrated before tribunals from different backgrounds and jurisdictions.

 

Good faith: civil law v common law approach

Good faith is a topic where the approach of civil and common law practitioners diverge: civil lawyers will naturally expect principles of good faith to apply in the JV context, whereas their common law counterparts will not consider parties to be under any general duty to “put one’s cards face up on the table” (Bingham LJ in Interfoto Picture Library Ltd. v Stiletto Visual Programmes Ltd [1989] Q.B. 433). Where JV disputes are being arbitrated, this can lead to different views amongst the tribunal and the parties and the panel will need to pay close heed to the applicable law governing the relationship to determine the parameters of the parties’ obligations to one another.

 

Good faith in English law: recent developments 

While there remains no general obligation to act in good faith in English law, there have been a number of recent cases in the English courts which have considered whether a more limited duty of good faith should be implied into certain contracts, such as joint venture agreements, where the parties are committed to cooperating together over the long-term for mutual benefit – so-called ‘relational contracts’. 

The trend started with Yam Seng Pte Ltd v International Trade Corporation [2013] EWHC 111 (QB) when Leggatt J (as he then was) found that relational contracts may require “a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements.” In other words, applying the usual business efficacy test for the implication of terms, the judge found that, in the circumstances (i.e. as a matter of fact), the contract was such that the term as to good faith was so obvious that it went without saying. In his judgment, Leggatt J specifically mentioned joint venture agreements as possible examples of these relational contracts.

More recently, in Bates v Post Office [2019] EWHC 606 (QB), Fraser J found that good faith obligations may be implied in relational contracts (in fact, he arguably went further in his judgment which can be read as suggesting that a duty to act in good faith would be implied as a matter of law into relational contracts). The judge did not seek to articulate a definition of what constitutes a relational contract but he did list certain features which these agreements are likely to have: long-term, mutual interest, high degree of cooperation and communication, substantial financial commitment and exclusivity. Obviously these are common features not only in joint venture agreements but in many other contracts in the mining industry (long-term offtake agreements may be another example).

That is not to say, however, that good faith will be implied into joint venture agreements as a matter of course. Indeed recent cases have indicated that the English courts remain reticent about implying such terms. In Russell v Cartwright [2020] EWHC 41 (Ch), for example, Falk J refused to imply a general duty of good faith into a joint venture agreement on the basis that “it was neither obvious, nor essential to the proper working of the contract”. Further, Falk J held that the existence of two express obligations to act in good faith meant that the parties had intended to limit the duty to act in good faith to those specific circumstances. Implying a more general obligation of good faith would therefore be “inconsistent with the express terms”. Similary in TAQA v RockRose [2020] EWHC 58 (Comm), Pelling J refused to imply a good faith term into an oil and gas joint operating agreement (JOA) on the basis that the language of the contract was unambiguous and the right (which was to terminate operatorship) was clearly intended to be unqualified. The judge observed that JOAs were “sophisticated and complex agreements drafted by skilled and specialist professionals” and therefore would be interpreted principally by textual (rather than contextual) analysis.

 

What is good faith?

In circumstances where a party is required to act in good faith, either by the express terms of the contract or because a term has been implied, what conduct would amount to breach of that standard? 

The courts have used phrases such as behaviour which “would be regarded as commercially unacceptable by reasonable and honest people”. Whilst this is relatively difficult to give practical meaning to, in Bates, Fraser J said that obligation was not a demanding one and therefore it would appear that the behaviour complained of would need to be relatively egregious to amount to breach of contract. If breach is established however, the consequences can be serious. In Yam Seng for example, the covering up by the defendant of the pricing arrangement it had with another distributor entitled the claimant to terminate the contract and claim damages.

 

Conclusion

JV agreements are par for the course in the mining sector and the complexity of such relationships coupled with the risky nature of the business mean disputes are not uncommon. Where one party is aggrieved at the behaviour of another, it is perhaps inevitable that it will plead that its partner failed to act in good faith, whether as a standalone cause of action or to bolster its case. In those circumstances, the parties and the tribunal will need to consider the governing law of the contract and how it addresses good faith. If the contract is governed by English law, there will be no general duty to act in good faith. However, there may be good faith obligations in the contract, either express or implied. The starting point is to look at the words used. Are there are any express obligations to act in good faith? If there are not, consider whether there may be an implied term. Have the parties agreed to exclude any term as to good faith being implied? If not, does the JV agreement bear the hallmarks of a relational contract? If it does, when considered in context, was it the reasonable intention/expectation of the parties that they would each act in good faith? Finally, even if there is an obligation to act in good faith, does the behaviour complained of breach that standard? 


With thanks to Madeline Hallwright, trainee, for her contribution to this article. 

 

 

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