Case Comment:
On
TAQA, JX, Spirit and Marathon were parties to numerous Joint Operating Agreements
Each of the JOAs provided for the removal of the Operator in three scenarios: (1) resignation; (2) immediate termination in the event of one of a number of specified events occurring, (e.g. if the operator became insolvent, if the Operator defaulted on any of its obligations under the agreement, etc.); and (3) by votes of all, or a majority, depending on the JOA, of the non-operator participants on not less than 90 days' notice to the Operator. Marathon was the Operator of the Brae Fields from the outset.
The Claimants voted to terminate Marathon as the Operator under each of the JOAs
On
RockRose asserted that the termination of Marathon's operatorship was invalid and of no effect
RockRose argued that the termination of Marathon's role as Operator was invalid and of no effect because the apparently unqualified right to terminate the operatorship was either: (1) on its true construction, not an unqualified right; or (2) was subject to various implied terms that qualified the circumstances in which the Claimants could exercise the right to discharge the Operator. RockRose asserted that these implied terms precluded the Claimants from exercising their powers of termination capriciously or arbitrarily and instead could only exercise them in good faith and in the best interests of the operation of each of the Brae Fields blocks. RockRose claimed that the Claimants breached these implied terms and therefore Marathon's discharge as Operator was improper.
The Claimants subsequently brought this action seeking a declaration that the notices of termination were valid and took effect in accordance with their terms.
The JOAs conferred an unqualified right to terminate the Operator role
The Court found that the JOAs clearly and unambiguously conferred an unqualified right to discharge the Operator.
- First, the clause granting the non-operator parties the right to terminate by voting stated "... [the] Operator may be discharged ... at the end of any calendar month by the Operating Committee giving not less than ninety (90) days' notice to it ...". This clearly and unambiguously conferred an unqualified right.
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Second, the language used elsewhere in the contract emphasized that the parties intended the provision to be unqualified.
Judge Pelling asserted that if the parties had intended the clause to be qualified, they could have done so, as they did in other provisions. - Third, if the parties had intended the clause to be qualified by the concept of good faith or other similar concepts they could and would have expressly stated so.
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Fourth, the inclusion of an unqualified right to discharge the Operator reflected and was consistent with the common understanding of the parties as to the nature of the relationship.
Judge Pelling noted that the contract specifically stated that the relationship was "not intended to be a partnership" and accordingly, the "parties were fully entitled to vote at [Operator Committee] meetings in accordance with what they perceived to be their own best interests."
There were no implied terms that qualified the manner in which the Claimants could exercise their termination rights
Marathon next argued that the termination provision was qualified by either: (1) an implied term that qualified the manner in which it may be exercised by concepts of good faith and other similar duties that arise between contractual parties; or (2) qualifications to a similar effect arising from the mutual trust, confidence and loyalty allegedly owed by parties to a joint venture.
None of the Claimants improperly exercised their right to terminate Marathon as the Operator
Although
Additionally,
Takeaway: parties to joint operating agreements are entitled to pursue their own self-interests in exercising rights under unqualified contract terms
While this case was decided in the
The duty of honest performance that I propose should not be confused with a duty of disclosure or of fiduciary loyalty. A party to a contract has no general duty to subordinate his or her interest to that of the other party. However, contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests. [emphasis added]
In the Claimants' case, there was nothing to suggest that any of the Claimants acted "capriciously, arbitrarily or in bad faith". Instead, the evidence supported that TAQA, JX and Spirit each sought to promote and protect their own individual self-interests. Absent any evidence of dishonesty, this conduct would not be enough to establish a breach of the duty of honest contractual performance under Bhasin.
Canadian oil and gas companies that are parties to joint operating agreements and joint ventures can take comfort in the certainty this decision provides. Subject to any specific contractual language to the contrary, while parties owe a general duty of good faith and honesty in their contractual performance, this duty will not lessen a party's entitlement to act in its own best interests while exercising the rights it has bargained for. Accordingly, operators should be aware that there will be no implied qualifications on provisions granting termination rights to non-operators, unless those qualifications are expressly provided for in the governing agreement(s). Where contracts clearly and unambiguously grant unqualified rights, regardless of whether the parties are participating in a joint operating arrangement, there will be no implied terms that will subsequently qualify that right.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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