The Court of Appeal has upheld a decision of the High Court in which an oil company was found in contempt of court for holding an operating committee meeting in the absence of an alleged defaulting party (see Pan Petroleum Aje Ltd v Yinka Folawiyo Petroleum Co Ltd & Ors [2017] EWCA Civ 1525).

In doing so the English Courts have confirmed a willingness to intervene on an interim basis to preserve the status quo and prevent remedies available under a joint operating agreement (“JOA”) from being exercised, pending the resolution of the issue in dispute by means of arbitration. In addition, to give force to such an interim remedy through findings of contempt.

The Court of Appeal decision is likely to have a significant impact on the conduct of joint operations under JOAs around the world, in circumstances where an issue in dispute between the JOA parties is pending resolution by arbitration.

Facts

As we set out in our coverage of the High Court decision at first instance (see Oil & Gas: JOAs – Restraining remedies for default (May 2017)), the background facts are as follows:

Pan Petroleum AJE Limited (“Pan Petroleum”), Yinka Folawiyo Petroleum Co Ltd (“Yinka”) and the other defendants are parties to an oil mining lease offshore the Federal Republic of Nigeria (the “Oil Mining Lease”). The relationship between the joint venture parties is governed by a JOA.

As is usual under a JOA, its terms provided for a Joint Operating Committee to exercise powers and make decisions in respect of joint operations. The JOA in question conferred power on the Operating Committee to vote on and pass binding resolutions as to the drilling and development of new wells, as set out in the Development Plan. Those voting procedures varied according to the significance of the decisions being taken. Any “major modification” to the Development Plan or to the budget for the operations required unanimous approval. Once a budget was approved by the Operating Committee, the JOA authorised the issue of “Cash Calls” to the parties.

In the event of non-payment of Cash Calls, the JOA between the parties contained the types of remedy typically found in international oil and gas JOAs. The JOA required that a party in Default (i.e. the “Defaulting Party”): (i) loses the right to attend Operating Committee meetings or to vote on any matter before the Operating Committee; (ii) loses the right to its participating share of any hydrocarbons; and (iii) if the Defaulting Party does not remedy its Default after a period of time (being 45 days in this case), it can be compelled to withdraw from the JOA and the Oil Mining Lease (or relevant granting instrument). Although not set out in the decision, it seems from the text of the above provisions contained in the decision that the JOA between the parties is based on the old 1995 AIPN Model Form Operating Agreement.

A dispute arose between the parties concerning, broadly, the drilling of two development wells within the area covered by the Oil Mining Lease (the “Development Wells”). At an Operating Committee meeting on 5 October 2016, Pan Petroleum opposed draft resolutions relating to one of the Development Wells. In late 2016, Pan Petroleum had refused to pay Cash Call(s) issued in respect of the Development Wells. It refused to do so on the basis that the drilling of the wells was premature. Further, that such operations required unanimous consent of the joint venture partners that had not been obtained (whereas the other parties to the JOA argued that a qualified majority was sufficient under the JOA). Accordingly, Pan Petroleum argued that any cash calls to the parties in respect of the Development Wells had not been issued in accordance with the JOA. However, because of its refusal to pay the Cash Call(s), on 21 October 2016 Pan Petroleum was issued with Default Notices requiring payment of the Cash Call(s), and further notices followed in November 2016.

Pan Petroleum applied to the English High Court for an interim injunction to prevent the non-Defaulting Parties from exercising any rights or remedies under the JOA.

In the period after the granting of the injunction, but before the interim injunction return date, the other JOA parties indicated that they proposed to proceed with the second Development Well. Budget proposals were circulated, which were opposed by Pan Petroleum on substantially the same grounds as it had objected to the first Development Well.

Three further Cash Calls, numbers 30, 31 and 32 were issued for payment on or before 27 December 2016. Cash Call 32 related in part to disputed Development Well expenses and was recalled and reissued on 6 March 2017. Upon non-payment of these Cash Calls, Default Notices were issued to Pan Petroleum on 9 January 2017.

Pan Petroleum was successful in its application for in interim injunction to restrain the non-Defaulting Parties from exercising any rights or remedies under the JOA in respect of the Development Wells. The decision granting the interim injunction has not been published, but much can be understood about its terms and significance from subsequent proceedings.

The interim injunction required:

“2. Up to and including the date specified […] the Defendants must not exercise or purport to exercise (by written notice or otherwise) in respect of the Aje-6 or Aje-7 development wells:

2.1 any of the rights and/or remedies in Article 8.4 of the Joint Operating Agreement to vest, deem to vest, transfer, or deem to transfer for its own benefit or otherwise the Claimant's Entitlement and/or Participating Interest in the Joint Operating Agreement or Oil Mining Lease 113;

2.2 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;

2.3 any right of termination at law or other remedy which would deprive the Claimant of its Entitlement and/or Participating Interests in the Joint Operating Agreement or Oil Mining Lease 113.”

In January 2017, and three days after a further hearing at which the interim injunction was continued, a meeting of the Joint Operating Committee was held, during which the Joint Operating Committee passed various resolutions relating to operations in respect of the Development Wells. Pan Petroleum was not invited to participate at the meeting, and was treated as being excluded from voting due to being in Default for failing to pay Cash Calls 30 and 32 that did not relate to the Development Wells in dispute.

In February 2017, with a view to avoiding contempt proceedings, Pan Petroleum repeated its invitation to the other JOA parties to withdraw the resolutions. Those requests were rejected. Pan Petroleum therefore commenced contempt proceedings on 1 March 2017, seeking declarations that the purported resolutions were illegal, null and void as a matter of English law.

High Court decision

At the hearing, there was some debate as to the precise wording of the interim injunction, and whether the resolutions passed at the January 2017 Operating Committee meeting approved the “financial calls and budgets for work on or with those [Development Wells], rather than the approval of the work itself”. However, the High Court was quick to find that the non-Defaulting Parties had breached the terms of the interim injunction and were in contempt of court.

The first, second and fourth defendants appealed against the decision to the Court of Appeal.

Court of Appeal decision

The appeal was rejected by the Court of Appeal, which upheld the High Court’s finding of contempt of court for breach of a prohibitory interim injunction made in support of arbitration proceedings.

The Court of Appeal decided that as a matter of construction it was clear that the overall wording: “the Defendants must not exercise or purport to exercise (by written notice or otherwise) in respect of the Aje-6 or Aje-7 development 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;” prohibited the appellants from doing what they purported to do on 23 January 2017: excluding Pan Petroleum from the Operating Committee on whatever basis and then passing resolutions in respect of the Development Wells.

The overall context and object of the injunction overwhelmingly supported that construction. From the time of the ex parte hearing onwards, Pan Petroleum was seeking relief to “hold the ring” pending the conclusion of the arbitration, not just to prevent the appellants from forcing its complete withdrawal from the project under Article 8.4, but also to prevent the appellants from excluding Pan Petroleum from the decision-making processes of the Operating Committee under Article 8.2, on whatever pretext or basis and then passing resolutions in respect of the Development Wells seeking to establish budgets and make Cash Calls.

The appendants’ submission that the injunction should not be construed as protecting Pan Petroleum in respect of undisputed Cash Calls, because it could not in such a case demonstrate any cause of action entitling it to be on the Operating Committee, was misconceived. The merits of the underlying claim of Pan Petroleum were to be determined in the arbitration, not before the Court and, in any event, at best this point would go to the question whether the injunction should have been made in as wide terms as it was (which is not the subject of the appeal), not to the issues of the correct construction of the injunction and whether the appellants were in contempt.

The Court of Appeal re-affirmed the principle that intent to breach a court order is not a requisite aspect in determining whether a contempt of court is established, even where the actions of the proposed contemnor were informed by legal advice.

Comment

Whilst the Court of Appeal decision provides an insight on how the English courts might approach the interpretation of the terms of an interim injunction, it will likely be of greater interest to those involved in the day-to-day management of oil and gas joint ventures where participants are not aligned on strategy or one party is allegedly in Default.

In the current market, operators have found it more difficult to gain unanimity on approving work programmes and budgets, or extensions to work programmes and budgets. As such, cash calls appear to be more regularly unpaid or disputed than was the case in the past. Further, debates seem to abound concerning whether sums cash called are properly authorised by the joint venture under the JOA.

For any joint venture governed by JOAs following the AIPN Model Form (or the Oil and Gas UK Model Form), the obvious risk for a party that does not wish to pay a cash call is that the operator (or other participant) will exercise the remedies contained within the default provisions of the JOA, and as a ‘Defaulting Party’ it will be prevented from voting on future decisions and will eventually be excluded.

Conversely, the AIPN Model Form Operating Agreement and Oil and Gas UK Model Form are structured so as to allow a Defaulting Party to be excluded swiftly, which allows the joint venture to continue operations in such a way as to ensure that the underlying obligations of the joint venture to third parties will be performed. The risk to the supposed non-Defaulting Parties is that any failure of the remedies mechanism to work in the time-periods envisaged risks gridlock and a failure of the joint venture’s purpose, resulting in losses and liabilities for all parties.

Where London is the seat of arbitration, the English High Court has the power to grant interim injunctions in support of arbitration. In deciding whether to exercise its discretion to grant an interim injunction, the High Court will consider: (i) whether there is a serious question to be tried; (ii) whether damages would be an adequate remedy; (iii) who the balance of convenience favours; and (iv) any special factors. In this regard, although the actual judgment where the interim injunction was granted is not available, the decision nevertheless shows that the High Court is willing to intervene, at least for a short period, in order to preserve the status quo.

Now that the Court of Appeal has confirmed the approach taken by the High Court at first instance, this decision could have a significant impact on the conduct of joint operations pending resolution of a dispute arising under a JOA. For example, while the injunction might prevent the non-Defaulting Parties from exercising any remedies to compel the Defaulting Party to withdraw from the joint venture, if the terms of the injunction are wide enough, excluding a Defaulting Party for a period of time not envisaged by the JOA.

Further, the wide terms on which the injunction was granted might be a cause for concern for non-Defaulting parties – suggesting that if a disputed Cash Call can be identified, a party unwilling or unable to pay Cash Calls generally might seek temporary shelter from the court pending the resolution of the ‘disputed’ Cash Calls. If this were to be the Court’s practice, it could have the impact of frustrating the operation of the default provisions of most JOAs.