Notwithstanding a degree of stability during 2017, the “lower for longer” oil price continues to affect the industry, and while these pressures can be positive, forcing efficiencies and stimulating innovation, they also bring challenges, and at times disputes.
Here are three decisions of the English courts of particular relevance to the oil and gas industry from the last year.
It is an “old chestnut” of English law that “agreements to agree” are too uncertain to be enforced; where markets change, parties may seek to use such arguments to escape inconvenient contract provisions.
The High Court in Associated British Ports v Tata Steel UK Ltd considered whether to declare a price review provision in a harbour licence as an unenforceable ‘agreement to agree’.
Since price re-opener provisions are found in many long-term commodity contracts such a finding would have sounded alarm bells in the industry.
The clause enabled either party to serve a notice in the event of any major physical or financial change in circumstances, requiring the parties to seek to agree amended terms within six months, failing which the matter should be referred to arbitration.
Tata served a notice in 2016 asking for a reduction in licence fees, as falls in the value of sterling and increased steel imports had made its steel uncompetitive.
The court found that the clause was not too uncertain to be enforceable, since the arbitrator could decide whether a notice was valid and what the fees should be.
It confirmed that the courts should strive to give meaning to clauses agreed by the parties, particularly where a contract had been performed over a long period of time.
By contrast, in Teekay Tankers Ltd v STX Offshore Ltd, the commercial court decided that an option for the construction of oil tankers, which required the parties to agree a delivery date, was void.
In 2013, Teekay and STX had entered into four firm shipbuilding contracts and an agreement by which STX granted Teekay options to build three further sets of vessels.
The delivery dates for the optional vessels were to be mutually agreed on exercise of each option but STX was to use best efforts to have delivery dates within 2016 for the first set, and within 2017 for the second and third sets.
Although STX was already in default in providing certain financial guarantees under the firm contracts, Teekay chose to exercise its options to build two sets of optional vessels.
The commercial court agreed with STX that the options were void – the delivery date was an essential term and the contract did not provide a clear method to determine the delivery date if the parties failed to agree.
It was not possible to imply a term that the delivery date would be whatever was reasonable as this was inconsistent with the requirement
for STX to use best efforts to identify dates within specified years.
The case demonstrates that where the parties have reserved the right to agree an essential term at a later date without any objective criteria to
be applied in reaching that agreement, or stipulating a third party to resolve the dispute, the courts are unlikely to be able to fill that gap.
Another type of contract feeling the effects of the challenging market conditions has been oil and gas joint operating agreements (“JOAs”). Operators have found it more difficult to get support for work programmes and budgets, and sometimes to get cash calls paid. A party that refuses to pay a cash call risks that the operator will exercise the default provisions of the JOA.
This means it will lose the right to attend and vote at operating committee meetings, lose its share of any production and, ultimately, if the default is not remedied may forfeit its interest under the JOA to the non-defaulting parties.
The alleged defaulter may, however, challenge whether cash calls have been properly authorised and therefore whether default remedies are applicable. The Oil and Gas UK Model Form JOA commonly used on the UKCS is structured to allow a defaulting party to be excluded swiftly, so the joint venture can continue to operate and to meet obligations to third parties, particularly the regulator.
However, for the non-defaulting parties a challenge to the validity of their actions risks gridlock and a failure of the joint venture’s purpose, resulting in losses and liabilities for all parties.
The potential ramifications of such a dispute are demonstrated by Pan Petroleum AJE Limited v Yinka Folawiyo Petroleum Co Ltd and others.
A dispute arose under a JOA in respect of an oil mining lease offshore Nigeria concerning the drilling of two development wells. Pan Petroleum refused to pay cash calls for the wells, arguing that drilling operations were premature, and that the cash calls were invalid as the required unanimous consent for such operations had not been obtained.
Because of its refusal to pay, Pan Petroleum was issued with a default notice.
Pan Petroleum applied successfully to the High Court for an interim injunction to prevent the non-defaulting parties from exercising the JOA’s remedies in respect of the development wells.
However, in January 2017, at a meeting of the operating committee, various resolutions were passed relating to the development wells. Pan Petroleum was not invited to attend or vote at the meeting. The High Court found that the non-defaulting parties had breached the terms of the interim injunction and were in contempt of court.
Where JOA disputes are referred to either the English courts or to arbitration with London as the seat, the English High Court will have the power to grant interim injunctions.
As this decision shows, the High Court is willing to intervene, at least for a short period, in order to preserve the status quo.
This could have significant impacts on the conduct of joint operations pending resolution of the dispute. The injunction might not only prevent the non-defaulting parties from exercising default remedies, but if the terms of the injunction are wide enough, or are interpreted broadly, the joint venture could conceivably be prevented from carrying out any further operations which are the subject of the dispute.
There have been too many decisions relevant to the industry to report fully here – however, we cover many more in our Annual Review of Developments in English Oil and Gas Law.
Please contact me at penelope.warne@cms-cmno.com for a copy or search for that title online.
Penelope Warne is senior partner and head of energy at CMS
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