Last week, the English High Court handed down a rare judgment interpreting the terms of one of the industry’s most familiar contracts: the joint operating agreement (JOA). It found that the non-operators’ right to remove the operator was unqualified and that consequently, there was no duty to exercise the right in good faith.
The decision will be of interest not only to oil and gas lawyers for its treatment of various commonly used JOA provisions, but also to practitioners in other industries who have been following developments in the law on good faith post Yam Seng  and more recently, Bates v Post Office .
Good faith and relational contracts
The case, TAQA v RockRose  EWHC 58 (Comm), involved a dispute over the termination of Marathon’s operatorship under a number of JOAs. The non-operators to the JOAs had voted unanimously to terminate Marathon’s appointment following its sale to RockRose and appoint TAQA as operator instead. RockRose claimed that the termination of Marathon’s appointment was invalid because the termination provision was subject to (i) an implied duty of good faith (relying on Braganza) and/or (ii) similar qualifications arising in long term joint venture and similar agreements (relying on Yam Seng, i.e. relational contracts). TAQA maintained that the termination right was an express and unqualified power, not a contractual discretion as in Braganza, and there is no special rule for implying terms into or interpreting relational contracts.
In reaching his decision in favour of TAQA, Mr Justice Pelling applied well-established English law principles of interpretation and contractual construction to the terms of the JOAs. Pelling J held that there was no ‘good faith’ implied term limiting or qualifying the right to depose the operator.
The English courts, unlike civil law jurisdictions, remain reluctant to provide for a general duty of good faith. This has been affirmed in recent years by several Court of Appeal authorities. There are, however, specific contexts in which the English courts will recognise more limited good faith duties and, since the case of Yam Seng, submissions by parties seeking to widen the scope of its application have become more common as parties seek to categorise conduct which would not otherwise amount to breach of contract as actionable bad faith.
In Yam Seng, the court identified a category of agreements known as ‘relational contracts,’ whose characteristics – mutual cooperation, high investment and exclusivity for a long period – demonstrate that the parties may expect each other to act in good faith. In other words, as it was put in Yam Seng, the parties may have had certain “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.” This will not be at the expense of contradictory express terms and it will be considered objectively in the particular commercial context. For any term to be implied into a contract, including an implied term of good faith, it must satisfy the normal principles governing contractual interpretation and implication of terms; it must be necessary to give business efficacy to the contract or so obvious that it goes without saying.
In TAQA v Rockrose Pelling J accepted that JOAs are “at least arguably” relational contracts. This is unsurprising since JOAs typically contain many of the provisions identified as features of relational contracts: they are typically long term, with a common interest and require a very high level of investment and a significant amount of cooperation (much of which is legislated for in the JOA through the operational and technical committee arrangements, accounting procedures and so forth).
Notwithstanding this conclusion, Pelling J declined to imply a general duty of good faith having considered the contractual terms. The judge acknowledged that the JOAs were “sophisticated and complex agreements drafted by skilled and specialist professionals.” His approach on construction was therefore to interpret the JOAs principally by textual analysis unless a provision lacked clarity or was apparently illogical or incoherent in accordance with English authorities on contractual interpretation. He found that, on its true construction, the termination right was an absolute and unqualified power without evaluation or adjudication by the non-operators. It therefore could not be qualified by an implied term, whether via Braganza or as a relational contract. Specifically on the latter, he reiterated that it does not follow from Yam Seng that where there is a relational contract, a duty will be implied.
Finally, he determined that the general language of the contract supported his view. Part of the judge’s reasoning was that the wording of the JOA made it “unambiguously clear” that Operating Committee representatives were entitled to vote in accordance with each of their own best interests: the operator was subject to the supervision and direction of the operating committee and the JOA provided that in “…exercising such supervision and direction, each representative on the Operating Committee shall act solely on behalf of the Party whom he represents and not on behalf of the Participants as an entity.” In summary, the judge said that the parties had adopted a particular contractual process. This had worked in the way it was presumed the parties had intended because of the clear drafting. If they had intended it otherwise, they would have said so expressly. In helpfully confirming the current commercial attitude of the English courts, he commented that implying good faith concepts into absolute rights conferred by professionally drafted or standard form contracts “would be an unwarranted interference in the freedom of parties to contract on the terms they choose.”
Having made these findings, it was unnecessary for Pelling J to go on to consider the particular conduct which RockRose alleged amounted to a breach of the implied good faith obligation. However, he did so at the parties’ request and it was his view that none of the non-operators’ conduct was contrary to a good faith obligation (had one existed) because their actions were not taken at the expense of the other participants. He considered each non-operator individually and found there to be genuine concerns about the financial and operational implications of Marathon remaining as operator after its purchase by RockRose. He did not go on to give examples of conduct which he considered would amount to acting in ‘bad faith’.
Other points of interest
There are several other useful points which come out of this case:
- The judge found that the JOAs did not create a fiduciary relationship based on the standard partnership exclusion provision, coupled with the obligation mentioned above that voting should be carried out in the voter’s own interest. This is helpful as there has been some uncertainty on the extent to which an operator may owe non-operators fiduciary duties.
- He also doubted that the role of an operator was akin to that of an agent.
- The unqualified contractual right to terminate was not affected by the Maximising Economic Recovery Strategy for the UK (MER) principles, not least in this case because MER post-dated the JOAs.
The future of good faith in JOAs
As Pelling J recognised, the principle of an implied duty of good faith is “an incrementally developing area of law” and one which is becoming a familiar argument in the English courts. This is particularly relevant to the oil and gas industry due to its high prevalence for long-term contracts which might be relational. The decision is subject to permission to appeal but is fairly unsurprising in that it upholds traditional principles of interpretation and reinforces the commentary from the Court of Appeal that there is no general doctrine of good faith for specific types of contracts, or at all. That said, until we have a clear and decisive authority from a higher court, parties may continue to contend for an implied general duty, especially in cases concerning relational contracts.
It is therefore important to consider, when drafting and negotiating contracts, whether an implied duty may arise. To avoid that situation, include express terms, make sure the provisions are clear and unambiguous and any rights (such as voting obligations) contain unqualified language. Where the express terms of the contract are clear, a duty of good faith is unlikely to be implied.