A decision to exclude an oilfield joint venture partner from an Operating Committee meeting was a clear breach of an English court interim injunction and thus constituted a contempt of court. The decision shows the English court taking a robust approach to ensuring protection of a party's interests pending ICC arbitration proceedings to resolve differences under a Joint Operating Agreement: Pan Petroleum AJE Ltd v Yinka Folawiyo Petroleum Co Ltd & ors [2017] EWCA Civ 1525

The claimant and defendants were involved in a joint venture for the development of Nigerian oilfields and were parties to a Nigerian law-governed Joint Operating Agreement (JOA). The JOA provided for disputes to be resolved by ICC arbitration in London.

A dispute arose concerning the validity of certain cash calls issued in respect of two development wells.

Claimant seeks to protect its position

The claimant, a minority shareholder under the JOA, was allegedly in default of a series of Default Notices requiring payment of certain cash calls. The claimant disputed the cash calls on the basis that they had not been validly issued.

The claimant sought an injunction from the English High Court, restraining the defendants from exercising certain rights under the JOA exercisable on default by the claimant on the basis that, unless restrained, the defendants would rely on the Default Notices to exercise those rights to exclude the claimant from the Operating Committee and to forfeit the claimant’s rights and interest under the JOA and an associated lease. The claimant argued that an award of damages would not be sufficient, not least because it might lose its ability to “attend, discuss, and influence decision-making, be properly informed, object to further decisions that require unanimity, and protect its substantial investments in the project to date”. There was also a fear that, by excluding the claimant from such decision-making processes, it would be exposed to greater operational, financial and environmental risks on the project.

The claimant obtained an interim injunction restraining the defendants from exercising or purporting to exercise “in respect of” two particular wells, any of the “rights and/or remedies in Article 8.2 of the Joint Operating Agreement to exclude the Claimant from participating in, or voting at, meetings of the Operating Committee”. Knowles J required substantial security of USD 1.5 million for the cross-undertaking in damages from the claimant.

A meeting held on very short notice

An Operating Committee meeting was held in January 2017, after the injuction had been granted, at which the defendants voted on and agreed various resolutions in relation to the two particular wells, two of which approved cash calls requiring payment from the claimant of various operational costs. The claimant was only given three minutes’ informal notice of the meeting and was not invited to participate. It thereafter brought an action for contempt of court against the defendants.

There was no suggestion that the defendants wilfully breached the injunction. Rather, it was accepted that the defendants’ position was that, as a matter of construction, the phrase in the injunction (ie “in respect of” the particular wells) only prohibited the defendants from excluding the claimant from the Operating Committee on the basis of the alleged default by the claimant in relation to the two wells referred to in the injunction. The defendants argued that as the claimant was in default in relation to cash calls not related to those particular wells, such exclusion was permissible. Notably, the defendants placed significant weight on legal advice obtained, which it claimed confirmed that the terms of the injunction permitted excluding the claimant from the Operating Committee and passing the necessary resolutions. The exact nature of the legal advice was unknown, as legal privilege was never waived.

Defendants breached the injunction

At first instance, Knowles J held that the defendants were in contempt of court as they had breached the terms of the injunction. The words used in the injunction were sufficiently wide to restrain actions that were “in respect of” the wells, even though such actions were undertaken in reliance on undisputed cash calls which did not actually concern those particular wells. The sanction for contempt was the declaratory relief sought, namely that the purported resolutions were illegal, null and void as a matter of English law.

The Court of Appeal concurred: the terms of the injunction clearly prohibited the defendants from doing exactly what they purported to do in January 2017; that is, exclude the claimant from the Operating Committee and thereafter pass a series of resolutions. In the court’s view, these actions were found to be the “clearest possible breach” of the injunction. By not returning to court to clarify the terms of the injunction, the defendants took the risk that, if they were wrong in their construction of the injunction, they would be in contempt of court. Furthermore, it was no defence for the defendants to show that they had acted on the basis of legal advice. As confirmed in The Tyre Manufacturers’ Conference Ltd’s Agreement [1966] 1 WLR 1137, this will only go to the question of mitigation (ie bona fide reliance on legal advice, even though the advice turns out to have been wrong, may be relevant, and sometimes very important, as mitigation) and not whether there was a contempt.

Comment

The availability of interim relief can play a critical role in the resolution of joint venture disputes, particularly in circumstances where monetary damages are envisaged to be insufficient to compensate a party for the loss incurred, and where quick decisions are required to keep a project on track.

Recent iterations of many of the leading institutional arbitration rules have allocated broad powers to tribunals to provide interim relief, thus narrowing the scope for national court involvement. At the same time, the increasing prevalence of emergency arbitration provisions in such rules has also enabled parties to obtain interim relief from emergency arbitrators in circumstances where the tribunal has not yet been constituted. Such measures are particularly beneficial when, for example, there is a need to maintain the confidentiality of the arbitration proceedings or concerns exist over the impartiality and/or competence of the relevant national courts.

Nonetheless, there are undoubtedly circumstances in which recourse to the national courts may still be preferred and/or necessary. This includes: (i) the need to seek relief on a without notice basis (many institutional rules require applications to be made with notice), for example, where a freezing injunction is sought to prevent the dissipation of assets; (ii) time constraints, in circumstances where the national courts might be able to provide relief much more rapidly than even an emergency arbitrator (which may be very important in order to protect a commercial development project); (iii) the general inability of a tribunal to bind third-parties; (iv) the need to ensure compliance with a tribunal’s directions and/or orders; and (v) where there are concerns about the enforceability of an emergency arbitration award in a particular jurisdiction.

The ability to seek interim relief from the court therefore remains a powerful tool in international arbitration pending resolution of the parties’ dispute. As a matter of English law, it is open to parties to exclude the jurisdiction of the English courts to award such relief, provided this is recorded in their agreement to arbitrate. However, given the flexibility and protection afforded by such recourse, parties are well advised to preserve their rights in the event that urgent relief from the courts is required. From a drafting perspective, it is sufficient to simply agree to an English seat of arbitration in order to draw upon the provisions of the Arbitration Act 1996 and the interim relief available from the English courts.

Finally, for those parties who are themselves subject to an interim injunction, this case is a useful reminder of the need to adhere strictly to the terms of any order. In the present case, it would have been far less risky for the defendants to have simply returned to court to clarify the meaning of the injunction. Had they done so, the judge would have clearly “disabused them straight away of the misapprehension that the Order permitted them to exclude [the claimant] from the Operating Committee” and confirmed the appropriate construction of the injunction.