Introduction

Papua New Guinea’s resources sector has again come under the media spotlight following the PNG Government’s decision to obtain a PGK 3 billion (AUD 1.2 billion) loan from UBS Bank to finance a 10% share placement in Oil Search. The announcement of the deal prompted the nation’s Ombudsman Commission to take the extraordinary step of ordering a “freeze” on the loan pending investigations into allegations of impropriety. The Ombudsman’s actions were, however, too late as the loan had reportedly been drawn down, and the share placement completed, some two weeks earlier. Nonetheless, these developments serve as an important reminder for parties to exercise particular care when negotiating or drafting commercial agreements with Government. This article outlines some important contractual mechanisms that investors should consider.

Conditions precedent

An important area to consider will be the conditionality of the agreement and the approvals that will be required in order to give effect to the transaction. In the case of the UBS loan, some have argued - including most prominently, the former treasurer, Mr Don Polye, who has reportedly filed proceedings challenging the validity of the loan - that the loan should have been approved by the PNG Parliament and that the failure to do so was unconstitutional (see section 209(1) of the PNG Constitution). A specific condition precedent dealing with the issue of approval should therefore be considered such that the relevant agreement does not become binding or effective until approval has been obtained. A mechanism should also be considered to deal with what is to occur if the condition precedent is not satisfied (e.g. an automatic right of termination). Of course, the parties will need to be guided in this respect by local counsel as to the precise applicable legal requirements.

Warranties and indemnities

Warranties are an important means of contractual protection which, if drafted carefully, can be used by one party to effectively hold another party to a promise that a particular set of assumptions are true or accurate as at an agreed point in time (usually at the time of execution but, in some cases, also at completion). When dealing with foreign counter-parties, or in this case the PNG Government, it is important to consider the inclusion of a warranty that the relevant agreement, if entered into, will not be in breach of domestic laws. Such a warranty should be coupled by an indemnity to make good any loss or damage incurred by the recipient of the warranty if it is later found to be materially false or misleading. Depending on the nature of the agreement, the recipient of the warranty could also have a specific right of termination.

Confidentiality

The disclosure of agreements dealing with the use or appropriation of public funds, or the discretionary exercise of power by public officials, should also be managed carefully. The private commercial interests of the parties involved need to be weighed against legitimate public interest concerns. Negative media coverage, even if unfounded, can have a profound detrimental impact upon the parties, including reputational damage. An agreement with Government should therefore include both a confidentiality provision and rules governing disclosure, such that any disclosure of the terms of the agreement (or matters relating to the agreement generally) by one party requires the approval of, or at least reasonable consultation with, the other party. As is often seen in commercial agreements, the obligation of confidentiality should be extended to apply to the “servants, agents and contractors” of the relevant parties as if they were a direct party to the agreement themselves. This mitigates the risk of unauthorised disclosure and provides a procedure for the orderly dissemination of market sensitive information.

Time of the essence

The parties may also wish to consider whether to make “time of the essence” in relation to the completion of the agreement or the performance of any other fundamental obligation under the agreement. A time of the essence clause will usually require the parties to perform an obligation by a time which is specified in the agreement, failing which the other party would have the right to terminate and claim damages (including, if applicable, liquidated damages). In the case of the UBS loan, the directive from the Ombudsman could have significantly delayed completion had it been made prior to the drawdown of funds. In such a case, the parties should consider what impact a failure to perform the relevant obligation will have on the parties and whether time should be made of the essence in that regard.

Financial security

Depending on the nature of the agreement, it may be necessary to include in the relevant agreement a mechanism by which payments may be secured (e.g. a bank guarantee, bond or overdraft facility). For example, payments due under a contract for the provision of services to Government, will usually require some form of security. It is not unusual, particularly in the case of emerging economies such as PNG, for payments to be delayed by Government entities over several months to allow for the raising of appropriate funds from treasury.

Termination and damages

Finally, in the event of breach, it is important to ascertain what steps will need to be complied with if an agreement is to be terminated and a claim for damages is made against Government. In PNG, for example, section 5 of the Claims by and Against the State Act requires notice of any claim against the State to be given within 6 months from the date on which the relevant cause of action accrued. A failure to give such notice can invalidate the claim altogether if it is to be brought before PNG courts (assuming the agreement does not spell out a dispute resolution procedure of its own (e.g. arbitration)).

Conclusion

As can be seen from the above, there are many issues that need to be taken into account when negotiating commercial agreements with Government entities. The PNG Government in particular has played, and continues to play, an active role in the development of the nation’s resources sector (as evidenced by the recent share placement in Oil Search). This creates a host of legal and practical considerations which are unique to PNG. That said, if structured the right way, with the right mechanisms in place, those issues can be dealt with under the relevant agreement in a very effective and comprehensive manner.