In TAQA Bratani Limited and others v Rockrose1 the High Court has recently considered whether Joint Operating Agreements ("JOAs") are relational contracts and whether the contractual rights in JOAs are subject to any implied duties, including a duty to act rationally and/or in good faith.

This decision provides some helpful clarification for parties involved in JOAs or similar agreements in relation to the question of whether (and to what extent) implied duties of good faith may be read into their contracts and whether unqualified termination rights are implicitly restricted by the duty to act rationally.

Background

The Defendant ("RRUK") was the Operator of five oil and gas field blocks on the UK Continental Shelf pursuant to four JOAs and a Unitisation and Unit Operating Agreement (which contained substantively the same terms, so far is relevant to this dispute). Pursuant to the terms of the JOAs, RRUK could be discharged by the Operating Committee giving not less than 90 days' notice. This right was unqualified by the express terms of the JOAs.

The First Claimant ("TAQA") served notice to transfer the operatorship of the field from RRUK to the another operator (the "Notice"). The Notice required transfer of the operation to be completed within 365 days of the Notice being sent.

RRUK refused to accept the validity of the Notice. RRUK asserted that the circumstances of its dismissal were unprecedented in the North Sea oil and gas business – and argued that TAQA's contractual power and discretion to transfer ownership was limited by an implied duty to act in good faith and/or an implied duty not to exercise its right of termination improperly or arbitrarily or irrationally.

Trial in respect of a single preliminary issue was heard in December 2019. The issue to be determined was framed, as follows:

"Whether, as a result of a term to be implied in or on the proper construction of each JOA, the exercise by each claimant as a participant of its right to vote for the termination of the operatorship was subject to constraints that it be exercised (i) in good faith, (ii) for proper purpose, and/or (iii) [not] otherwise arbitrarily or irrationally".

Legal arguments

RRUK argued that each of the termination provisions within the JOAs were subject to:

  • an implied term that qualified the manner in which it may be exercised by concepts of good faith, and genuineness and the absence of arbitrariness, capriciousness, perversity and irrationality (often referred to as the "Braganza Duty"2); and/or
  • a qualification to similar effect arising from the mutual trust, confidence and loyalty said to arise in long term joint venture and similar contracts (in other words, an implied duty of good faith).

The Claimants however asserted that the termination provisions created an express and unqualified power to terminate the JOAs. Such rights were not a contractual discretion which was subject to any implied restrictions in relation to how that discretion can be exercised. The Claimants further argued that although the JOAs were a long term joint venture contract (which may be described as a form of "relational contract"), there are no special rules which apply to relational contracts. Consequently, the JOAs (like all other contracts) should be construed and terms can be implied into them, only by applying conventional principles.

The legal issues which arise in this dispute bring to the fore the natural tension between the developing body of case law which has been generally supportive of the notion that a duty of good faith may be implied into certain types of commercial contracts (stemming from the decision in Yam Seng Pte. v International Trade Corp3) and the restrictive approach English law has taken towards the implication of terms (see Marks & Spencer v BNP Paribas Securities Services Trust Co (Jersey) Limited4). It was also necessary for the court to consider the scope and limits of the Braganza Duty, in the context of an absolute contractual termination right.

High Court's decision

The High Court found in favour of the Claimants and, in doing so, refused to limit or restrict the power of the Claimants to exercise their termination rights under the JOAs, in the manner proposed by RRUK. HHJ Pelling QC further held that TAQA's contractual power and discretion to transfer ownership from the current Operator was not subject to any duty of good faith and/or the Braganza Duty. This was because the relevant provision in the JOAs created an unqualified or absolute right to discharge RRUK, providing only that the requisite qualified majority of participants voted in favour of the discharge. The notion that terms could be implied to qualify that right was rejected on the basis that:

  •  the implication of such terms was not necessary to give business efficacy to the JOAs or in order to give effect to what was so obvious that it went without saying;
  • as a more general matter, the Braganza Duty has no application to unqualified termination provisions within complex commercial agreements, negotiated by sophisticated commercial parties.

In the judge's view, if it were the case that the Braganza Duty should be implied into the JOAs "then there is almost no contractual provision that would not attract [it]", which in turn would have profound implications for English commercial and contract law. The judge also stated that to extend the doctrine in the manner argued by RRUK "would be an unwarranted interference in the freedom of parties to contract on terms they choose".

In relation to whether or not the Claimants, when exercising their termination rights under the JOAs, were required to act in good faith, the judge held that they were not subject to any such duty.

Although the judge accepted that it was "at least arguable" that the JOAs were relational contracts, "that does not lead to the conclusion that it is necessary to imply a good faith obligation". This was because, in the judge's view:

  • on its true construction, the termination right in the JOAs was an absolute and unqualified power;
  • it is therefore impermissible to imply a term that qualifies what the parties have agreed between them;
  • it is not necessary to imply such a term because the contract works as the parties intended.

The judge also noted that, in the context of joint ventures generally, there will in most cases be a good degree of "alignment" between the interests of joint venture parties, but that this does not lead to the conclusion that an unqualified right to discharge an operator should be treated by implication as being qualified in the manner suggested by RRUK if those interests diverge.

In relation to the question of whether there was any established "industry practice" concerning the supply of information, it was held that:

"There is…no industry practice that governs the supply of information, nor one that requires information to be supplied to a party concerning an issue on which it is not entitled to vote and there is no industry practice that requires a party to look at the interests of the joint venture when exercising unqualified contractual powers".

It naturally followed from this finding that there was nothing that precluded a party from exercising an unqualified right to discharge an Operator on notice if that party perceived this to be in its best interest.

Comment

This decision provides some clarity for parties involved in JOAs or similar agreements who may have had concerns regarding whether or not their agreements had become inadvertently subject to implied duties of good faith and/or whether any termination rights (which appear to be absolute and unqualified) were in fact subject to "Braganza-type" restrictions in relation to how they can be exercised, in light of subsequent developments in English law.

More broadly, this case is a useful reminder that, notwithstanding recent decisions regarding the interplay between good faith and "relational contracts" (in particular following the decision in Bates v Post Office5), the threshold for implying terms into contracts remains high, and it will not automatically be the case that a "relational contract" is subject to an implied duty of good faith. This approach follows the more restrictive approach previously taken by the Court of Appeal in Globe Motors v TRW Lucas Varity Electric Steering6, in which it was held that the implication of a duty of good faith is only possible "where the language of the contract, viewed against its context, permits it".

Parties to long term contracts (which may be "relational contracts") should, however, be alive to the possibility that they may nevertheless face arguments about the existence or scope of implied duties of good faith. It remains the case that the safest way of heading-off such arguments is by expressly excluding general duties of good faith, and/or identifying any specific provisions which the parties intend should be subject to a duty of good faith.

[2020] EWHC 58 (Comm)
See Braganza v BP Shipping Ltd & another [2015] UKSC 17
See [2013] 1 All E.R (Comm)
See [2015] UKSC 72
Bates v Post Office Ltd (No.3) [2019] EWHC 606 (QB)
[2016] EWCA Civ 396