Joint Operating Agreement arguably a “relational contract” but Commercial Court declines to imply duty of good faith or Braganza duty

In a recent decision, the Commercial Court found that an express and (on its face) unqualified right to discharge the operator in a Joint Operating Agreement (JOA) was not subject to any implied term of good faith, or that the right would not be exercised capriciously, arbitrarily or unreasonably: TAQA Bratani Limited and Others v RockRose UKCS8 LLC [2020] EWHC 58 (Comm).

The decision confirms that unqualified termination or discharge rights in JOAs are unlikely to be subject to implied terms of good faith, and therefore provides comfort for those who might exercise such rights.

The decision is also of interest in that, despite the court being prepared to treat the JOAs as arguably falling into the category of “relational” contracts (as considered here, for example), it nonetheless declined to imply an obligation of good faith in relation to the discharge right.  It is therefore a helpful reminder that the question of whether a contract is “relational” is just part of the analysis. The onus will still be on the party seeking to establish a duty of good faith to show that such a duty should be implied. As this decision makes clear, where that duty would qualify an otherwise unqualified contractual right, this may prove to be difficult.

James Robson, a senior associate in our disputes team, considers the decision further below.

Background

The defendant, RockRose, was the operator of the Brae Fields in the North Sea. There were four Joint Operating Agreements and a Unitisation and Unit Operating Agreement (together, the “JOAs”) between the defendant as Operator and the claimants as non-operating Participants (TAQA, JX Nippon and Spirit Energy).

The JOAs each contained the following clause governing the discharge of the Operator (or a clause not materially different to this):

19.1 Operator may be discharged;

(a) at the end of any calendar month by the Operating Committee giving not less than ninety (90) days notice to it, provided that in respect of any vote of the Operating Committee on any such discharge under this Article 19.1(a) the voting interest of the Participant which is the Operator and the voting interest of any Participant which is an Affiliate of the Operator shall be ignored and the required percentage figure shall be one hundred per cent (100%) of the total votes available to the remaining Parties;

The claimants voted unanimously to terminate the appointment of the defendant as Operator under each of the JOAs, and notices were served giving the defendant 365 days’ notice of its termination as Operator.

The claimants sought declarations from the court that the notices were valid. They argued that they had an unqualified right to discharge the defendant as Operator, which they had validly exercised.

The defendant argued that the express terms on which the claimants relied were impliedly qualified, such that the claimants could not exercise their right to discharge the Operator capriciously or arbitrarily, and could only do so in good faith.

Decision

The Commercial Court (His Honour Judge Pelling QC sitting as a High Court Judge) held that, on their true construction, the express terms of the JOAs conferred an absolute right to discharge the defendant as Operator, which was not subject to any implied constraint as alleged by the defendant.

Express terms

The judge held that the express terms of the JOAs were clear. Clause 19.1 unambiguously conferred an unqualified right on the claimants. The decision to discharge the Operator was a binary one with no room for evaluation or adjudication. If the parties had intended to qualify the discharge right, they could and would have done so expressly.

Looking at the contract as a whole, the judge also noted that the inclusion of such an unqualified right was consistent with the common understanding of the parties as to the nature of their relationship. The JOAs did not establish a partnership, and if the parties’ interests were no longer aligned, they were free to act in their respective individual best interests.

The judge added that there was nothing within the factual or commercial matrix which suggested that the court should reach a different view on the appropriate construction of the contract.

Implied terms

The judge went on to consider whether the express provision was qualified by an implied term. The judge referred to the principles applicable to the implication of terms, as set out in the Supreme Court’s decision in M&S v BNP [2015] UKSC 72 (considered here). These include the principle that, where there is a detailed commercial agreement, terms are to be implied only if to do so is necessary in order to give the contract business efficacy or was so obvious that it goes without saying. He then went on to consider the alternative bases on which the defendant sought to establish that terms should be implied.

First, the defendant relied on the Supreme Court’s decision in Braganza v BP Shipping Ltd [2015] UKSC 17 to argue that an implied term qualified the manner in which the discharge right may be exercised, such that it was limited by concepts of “good faith, and genuineness and the absence of arbitrariness, capriciousness, perversity and irrationality”.

The court held that no such qualification fell to be implied. It was not necessary to imply any of the terms for which the defendant contended either to give business efficacy to the JOAs or to give effect to what was so obvious that it went without saying. Further, while accepting that this is an incrementally developing area of law, the judge considered it clear that, on the current state of the authorities, the Braganza doctrine has no application to unqualified termination provisions sitting within complex agreements between sophisticated commercial parties. Extending a Braganza duty to absolute rights in professionally drafted, or standard form, contracts would be an “unwarranted interference in the freedom of parties to contract on the terms they choose, at any rate where there is no fiduciary relationship created by the agreement”.

Second, the defendant argued that the JOAs were ”relational” contracts and, as such, a duty of good faith should be implied into the relevant clause, relying on Yam Seng Pte v International Trade Corp [2013] EWHC 111 (QB) (considered here).

The judge was prepared to treat the JOAs as being at least arguably ”relational” contracts (presumably because, as is typical for such agreements, they were long-term and involved a high degree of co-operation and collaboration between the parties). However, he did not accept that a duty of good faith fell to be implied as a result. This was principally because the parties had legislated for the discharge of an operator in clear, express terms, and an implied duty of good faith would impermissibly qualify that right. As the judge put it, “it is not necessary, indeed it would be wrong, to imply such a term … because it is not necessary in order to make the contract the parties have chosen work as it is to be presumed they intended it to work, or, to the extent there is any difference, to give effect to their presumed common intention”.

In the context of their implied term arguments, the defendant placed significant weight on the Oil and Gas Authority’s “Maximising Economic Recovery Strategy for the UK” (“MER UK”). The defendant argued that this strategy emphasised collaboration, cooperation and straightforward dealing between licence holders, and those features “chimed” with the implied terms the defendant was seeking. The judge rejected this argument. MER UK was published in 2016, and so could not inform an implied term in an agreement signed many years earlier.

The defendant also introduced expert evidence to try to establish that there was an industry practice which qualifies an unqualified discharge right, and that this context is relevant either to construing the express terms, or implying a term. The judge rejected this too. Indeed, the judge concluded that the expert evidence demonstrated that there is no such industry practice.