In May 2012, Adamantine entered into a Production Sharing Contract ("PSC") with the Kenyan Government relating to largely unexplored land in Northern Kenya. The PSC provided for 3 stages of exploration: an Initial Exploration Period of 2 years where Adamantine was obligated to expend a minimum $10m and to carry out certain minimum work obligations ("IEP"); an optional further 2 year exploration period by applying to the Minister of Energy with the Minister being obliged to grant it if the IEP obligations had been fulfilled, with a further $25m minimum spend and further minimum work requirements required in this further period ("1AEP"); and a second additional exploration period for a further 2 years with accompanying further minimum expenditure and work obligations ("2AEP").
In September 2012, Adamantine assigned a 50% participating interested to Bowleven under the terms of a Sale and Purchase Agreement ("SPA") which obligated Bowleven to carry the minimum costs for the exploration phases, with costs over the minimum spend being shared 50/50 with Adamantine.
"Drill or Drop" Term
Cl.8 of the SPA provided that not later than 3 months before the expiry of each exploration period (or any extension of it) the parties were to hold a meeting of the Management Committee to discuss, in good faith, and then vote on whether they jointly wish to proceed into the next exploration period. If they agreed, then Adamantine would do what it needed to do under the terms of the PSC to bring the next exploration phase into effect. If both parties agreed not to proceed, then Adamantine would give the requisite notice under the terms of the PSC to relinquish the interest. However, if one party voted to proceed and the other did not, then the party not wishing to proceed was required to assign its 50% participating interest in the PSC to the other for nil consideration.
The IEP was due to expire on 28 August 2014. However, seismic data would not be available by that time and an extension of the deadline was sought and obtained until 26 May 2015. The parties agreed the effect of this extension was to postpone the date for the drill or drop vote until 25 February 2015.
Further delays were incurred such that by January 2015 it was apparent to both parties that the minimum work obligation and expenditure in respect of certain works (2D seismic work) which was required to be completed in the IEP was not going to be completed before the expiry of the IEP on 26 May 2015. On 6 February 2015 Adamantine made an application for a formal extension of the IEP under the terms of the PSC. On 9 February 2015, Adamantine gave notice for a management committee meeting to take place on 25 February for the purpose of there being a drill or drop vote under cl.8 of the SPA.
At the management committee meeting on 25 February 2015, Bowleven raised the fact that the minimum requirements would not be fulfilled under the IEP, the parties did not have the right under the PSC to move into the 1AEP and, therefore a drill or drop vote was irrelevant. Adamantine called for the vote and indicated that they would vote to move into the next exploration phase. Bowleven's position was (as clarified in communications following the meeting) that on the basis the parties were unable to move into the next exploration phase, it voted no, but that if a further 12 month extension was granted under the PSC, there should be a further vote 3 months prior to any extended expiry date. Adamantine responded to Bowleven's position by seeking to treat it as a no vote and proceeded to seek to enforce the forfeiture rights under cl.8 of the SPA.
The dispute, therefore, was as to the validity of the drill or drop vote at the management meeting on 25 February 2015. Adamantine say the vote was valid, that Bowleven is to be treated as having voted no and that Bowleven is therefore required to transfer its 50% participating interest to Adamantine for nil consideration. Bowleven's primary case was that the vote was not valid because the vote could only be as to the exercise of the stepped exploration rights under the PSC and that the parties accepted at the relevant time that the right to move from IEP to 1AEP had not been triggered because the minimum works had not been completed.
Court's approach top interpretation
The case concerned the interpretation of cl.8 of the SPA. There is well settled law as to the Court's approach to contractual interpretation. What the Court is concerned with is to identify the intention of the parties. It does that by reference to what a reasonable person, having all the background knowledge which would have been available to the parties, have understood them to have meant. It does so by focusing on the meaning of the words. The meaning is assessed in light of (i) the natural and ordinary meaning of the words, (ii) any other relevant provisions, (iii) the overall purpose of the clause and the agreement, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed and (v) commercial common sense but (iv) disregarding subjective evidence of any party's intentions.
The Court agreed with Bowleven. It found that the starting point was that the vote contemplated was a vote on whether to invoke the step rights under the PSC to move into the next stage of exploration. The decision required by the vote under cl.8 was whether to enter into 1AEP. It was common ground that there was only the right to move to 1AEP if the minimum work and expenditure obligations had been fulfilled by the end of the IEP. In these circumstances, cl.8 required a vote on whether to invoke such rights but if it turned out that none existed because the work was not done in time, a yes vote would not enable Adamantine to invoke existent rights. There was, though, in those circumstances an important commercial purpose to be served by requiring a vote to cater for the contingency that such rights may arise and be capable of being invoked. The party that wishes to proceed needs to know the other parties intentions in advance as it may need to arrange finance and that may involve farming out some of its interest. This is why 3 months was allowed for between the vote and the expiry of the IEP. The commercial imperative was that each party should have the maximum opportunity to assess the existing data before being required to make a drill or drop decision consistent with the countervailing desirability of commercial certainty in having a vote 3 months before expiry to allow for forward planning. Cl.8 was therefore to be constructed as obliging a party to vote only at the end of the period ending 3 months before expiry of the IEP.
The Court found that there could be no requirement for a drill or drop vote at a time at which there was known to be no realistic possibility of invoking rights to move to the next exploration phase 3 months later. In summary, there could be no valid or meaningful vote on whether to invoke rights which it is known will not exist.
As a result, the drill or drop vote on 25 February 2015 was not valid and Bowleven was not obliged to transfer its 50% participating interest to Adamantine.
This decision does not, in itself break new ground as regard the Court's approach to contractual construction; the Court's approach is well established. What is interesting is how it has been applied in this case. All cases of contractual interpretation will turn on their facts. Here, the court's approach was very much aligned with the commercial purpose of the contract. The Judge's reasoning makes commercial sense: how can a vote to do something be a valid vote when the parties knew at the time of the vote that what they were voting for could not happen at the relevant time? The Court does, however, need to be careful not to cross the line by interposing its view on what it thinks the parties should have agreed, not what the parties have actually agreed by reference to the language they have used in the contract. It would certainly be a ground for appeal, as a matter of law, if that is what the losing party considers the Court has done. However, on the face of it, a commercial approach will give parties some comfort – there is always fear that commercial agreements can be given overly technical and legalistic effect – when disputes arise.