Should an operator be paid for incurring expense on behalf of the joint venture without first seeking the authorisation required in the joint venture agreement?

The High Court in BG v. Talisman [2015] EWHC 110 (Comm) has provided some important guidance on this issue within the context of the cost-sharing mechanisms in an oil industry agreement, reminding practitioners that “the answer” depends upon what the parties have agreed. On the facts, the High Court decided that the relevant agreement did not make co-venturer payment conditional upon authorisations required by the contract.  

Facts:

BG and Talisman entered into a transportation, processing and operating services agreement (the “TPOSA”) concerning operations on the UK Continental Shelf,  whereby Talisman (as operator of the Ross Field) would provide certain transportation, treatment, processing, storage and offloading services to the owners of the adjacent Blake Field (operated by BG).  

According to the terms of the TPOSA, BG was to pay for the services provided through a contribution to Talisman’s relevant operating expenditure.  The contribution was to be calculated by BG paying the proportion of operating expenditure related to the “stabilised crude oil” allocated to the Blake Field. 

Talisman provided the services under the TPOSA using a floating production, storage and offloading vessel (the “FPSO”), which was originally chartered from a third party owner of the FPSO, Bluewater (Floating Production) Limited (“Bluewater”), under the terms of a specific agreement (the “FPSO Agreement”). 

After four years Talisman took over the operation of the FPSO from Bluewater and replaced the FPSO Agreement with a bareboat charter (the “Bareboat Charter”). 

Talisman sought to change the basis upon which BG was required to pay, so as to charge it for its proportion of operating expenditure related to the “stabilised crude oil” allocated to the Blake field calculated on the basis of the Bareboat Charter cost rather than the FPSO Agreement.  

Clause 6.4 of the TPOSA required as follows (our emphasis):

“[Talisman] has not…made any changes and shall not agree to any changes: (i) to the contractual payment obligations in the FPSO Agreement which will result in increases to Operating Expenditure; nor (ii) in the terms of the FPSO Agreement which would have an adverse material impact on the Services [under the TPOSA], without obtaining the prior written approval of [BG], such approval not to be unreasonably delayed and/or withheld.”

Having decided that that “operating expenditure” meant actual expenditure and that the Bareboat Charter could be substituted for the FPSO Agreement, the court had to decide: (i) whether BG’s prior written approval was a condition precedent for the replacement of the FPSO Agreement with the Bareboat Charter (and the associated extra operating costs); and (ii) the effects of a breach of the consent requirement.  

Decision:

Consent as a Condition Precedent

The requirement for consent in Clause 6.4 did not operate as a condition precedent to the payment of the contribution to operating expenditure. It was a promissory undertaking. Clause 6.4 did not render the unapproved changes to Talisman’s contractual payment obligations under the FPSO Agreement ineffective as between Talisman and BG (to the extent that they resulted in any increases to the operating expenditure). 

Effects of Breach

Whether BG’s consent was actually sought was a fact disputed between the parties and the court was not asked to determine that fact (it rather focussed on providing answers to an agreed list of questions).   

On the wording of Clause 6.4, a failure to seek consent was a breach of contract.  The remedy for breach of the obligation to seek consent was damages.  The assessment of damages flowing from the breach depended upon whether it would have been reasonable or unreasonable for BG to withhold its approval (owing to the presence of that stipulation within Clause 6.4).  If a reasonable ground existed, the damages would be the value of the additional operating expenditure contribution.  If no reasonable ground existed, BG’s claim would have no value (nominal damages). 

The burden of proof in showing that BG’s withholding of approval was, or would have been unreasonable rested with Talisman. Talisman’s subjective belief was irrelevant.  Instead, it was necessary to undertake an objective assessment, on the balance of probabilities, of whether the replacement of the FPSO Agreement with the Bareboat Charter would lead to increased operating expenditure or have a material adverse impact on the services provided under the TPOSA.  

Comment:

The joint ownership of licences/assets and sharing of infrastructure in the oil and gas industry means that many agreements between oil companies contain provisions for cost sharing, which require consent from co-venturers before incurring additional expenditure. For example, the Oil and Gas UK Model Form JOA and the Association of International Petroleum Negotiators Standard JOA both require approval of budgets, costs and/or contracts by co-venturers.  

This judgment of the English High Court is a reminder that contractual terms requiring authorisation for expenditure will not always be construed as being a condition precedent for reimbursement by co-venturers. In ascertaining whether consent or authorisation is a condition precedent to payment, English law will consider the terms of the agreement itself. Each contract must be “read on their own terms”. 

Therefore, whilst consent or authorisation is capable of being a condition precedent in some circumstances, the words of the contractual term in question may mean that a breach of the requirement is not a condition to payment but simply a breach of contract. If so, payment will be due. However, this will be subject to a cross-claim for damages. The quantum of any cross-claim for damages will depend upon whether damage has flowed from such a breach. If consent or authorisation would have been required to be given in any event, it seems likely that no damage will flow and the value of any cross-claim for damages will be zero or nominal.    

In this case the High Court did not have to grapple with the issue of what would occur if the liability of the operator is excluded for such a breach of contract, which might be said to leave the co-venturers without a remedy if the operator proceeds outside the contract. Such a scenario might raise questions about whether the High Court would have taken a different approach to its analysis, or, alternatively, whether it would seek to limit the scope of any contractual exclusion of the operator.   

The case is available here.