Bowleven was at risk of losing its 50% participating interest in a Production Sharing Contract to Adamantine, but the Commercial Court found that arguments advanced by Adamantine would have "odd and uncommercial consequences". The case presents a useful reminder to businesses of how the courts will construe your contracts and their focus on the commercial intention of the parties.
Adamantine and Bowleven entered into a sale and purchase Agreement (SPA) to assign to Bowleven half of Adamantine's interest in a Production Sharing Contract (PSC) in respect of a Kenyan block. Under the PSC the exploration phase was divided into three periods. The SPA contained a `drill or drop' provision, requiring the parties to meet and choose whether or not to proceed to each subsequent period. If one party elected to proceed to the next stage and the other did not, the withdrawing party was obliged to assign its interest to the other.
Under the PSC, Adamantine was required to fulfil minimum work obligations before the initial exploration period expired. At the time of the vote it was clear to both parties that these obligations would not be met. At the meeting only Adamantine voted to proceed to the next phase (conditional on further time being allowed to complete the minimum work obligations) and subsequently requested that Bowleven assign its interest to it in accordance with the SPA. Bowleven refused, maintaining that the drill or drop vote was invalid as the failure to meet the minimum work obligations would prevent the parties from proceeding to the next period.
Applying established principles for interpreting commercial contracts (see box), the Court held that, as the minimum obligations were not fulfilled, the right to progress to the next exploration stage did not exist and a vote to do so was meaningless. Bowleven was not therefore obliged to relinquish its participating interest. There was no fairytale ending for Adamantine.
The key takeaways for your business are as follows.
- Courts will review contracts against the commercial background in which they were drafted.
- The court's views as to what you and your counterparty intended when your contracts were signed might radically differ from your own. Clarity is key.
- The Court is concerned with identifying the intention of the parties 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, which is assessed in light of:
- the natural and ordinary meaning of the words;
- any other relevant provisions;
- the overall purpose of the clause and the agreement;
- the facts and circumstances known or assumed by the parties at the time that the document was executed; and
- commercial common sense, but disregarding subjective evidence of any party's intentions.