Id still love to see the JOA between OBL and backreef.
The Empire decision: forfeiture remedies under joint operating agreements
Australia, Brisbane, Melbourne, Perth, Sydney | 12 September 2014
In brief
Empire Oil Company (WA) Limited v Wharf Resources plc [2014] WASC 179 is a recent decision of the Supreme Court of Western Australia concerning the enforcement of a forfeiture remedy in a petroleum joint operating agreement following a failure to pay a cash call.
The facts
Empire Oil Company (
Empire), ERM Gas (
ERM) and Wharf Resources (
Wharf) were the registered holders of petroleum exploration permit EP 389 and had appointed Empire as Operator under the associated joint operating agreement (
JOA).
Under the JOA:
- before incurring any expenditure, the operator had to issue an authority for expenditure (AFE) for approval by the parties (by majority vote of two or more unaffiliated parties holding more than 65% participating interest),
- once approved, the Operator was authorised to issue cash calls to the parties pursuant to the AFE, and
- the parties agreed to pay their participating interest share of those cash calls within 21 days of receipt.
Wharf failed to pay a series of three cash calls, and as a result, became a 'Defaulting Party' under the JOA. Where a party remained a Defaulting Party for more than 45 days, a Defaulting Party was deemed to have given a notice of withdrawal from the JOA and to have assigned its participating interest to the non-defaulting parties. The non-defaulting parties were granted a power of attorney by the Defaulting Party to sign all documents necessary to give effect to the withdrawal.
Wharf remained a Defaulting Party for 45 days in relation to one of the cash calls and as a result, it was alleged that Wharf was deemed to have withdrawn from the JOA. Empire and ERM subsequently executed transfers and deeds of assignment and assumption to give effect to the withdrawal and submitted them to the Western Australian Department of Minerals and Energy (
DME) for approval and registration.
The proceedings
Empire and ERM subsequently commenced proceedings in the Supreme Court of Western Australia seeking declarations that:
- Wharf was a Defaulting Party as a result of not paying the three cash calls,
- Wharf had withdrawn from the JOA, and
- the transfers lodged by Empire and ERM to give effect to Wharf’s withdrawal approved and registered by the DME.
Wharf initially entered an appearance through its solicitors and filed pleadings in response to the claims. Its solicitors subsequently withdrew from acting, however. At trial, there was no appearance on behalf of Wharf and accordingly no arguments were made in its defence.
Although Wharf did not appear at trial, Justice Chaney did consider the defences filed by Wharf in its pleadings.
Wharf pleaded that:
- Empire (as Operator) had no authority to issue the cash calls because, by the time of their issue, the parties were associated in a Production Joint Venture to which the original JOA did not apply. Justice Chaney rejected this argument, stating that the JOA continued to apply in the absence of parties entering into a specific Production JOA.
- Empire and ERM had breached the JOA by not entering into a Production JOA and therefore had no right to benefit from Wharf's breaches of the JOA. Justice Chaney also rejected this argument, saying that the JOA only required the parties to negotiate a Production JOA in good faith and where no Production JOA existed, the JOA clearly provided that it would continue in effect until superseded.
- Empire was in breach of the JOA but, as Wharf did not lead any evidence of such breaches, this argument was rejected.
- It disputed the fact that it was a Defaulting Party for the purposes of the JOA but, again, Wharf did not lead any supporting evidence and this argument was also rejected.
As a result, Justice Chaney found that the process of approving the AFEs, the service of the cash calls and Wharf’s withdrawal had all been in accordance with the terms of the JOA and Empire and ERM were entitled to all of the declarations sought.
Conclusion
Although forfeiture remedies in JOAs are common, there are concerns about their enforceability.
For example, equity will intervene to provide relief against forfeiture where there is an element of fraud or other unconscionable behaviour on the part of the non-defaulting parties exercising the forfeiture remedy (eg by failing to follow the forfeiture procedures in the JOA).
In addition, a forfeiture remedy may be void as a penalty where the value of the forfeited interest is disproportionate to the value of the loss flowing from the breach of the JOA. Concerns that a forfeiture remedy may be a penalty become more acute when a project increases in value following a discovery and as a project progresses into appraisal, feasibility, development and ultimately production.
Curiously, Wharf failed to plead either of these defences and, as such, the Court was not asked to consider the enforceability of the forfeiture provisions of the JOA.
In the circumstances, the decision is unfortunately not authority for the proposition that forfeiture remedies in petroleum JOAs are enforceable under Australian law.
This article is an abridged version of a manuscript submitted for publication in the Australian Resources & Energy Law Journal.
This article was written by Robert Merrick, Partner, Nathan Colangelo, Senior Associate and Kenneth Lee, Solicitor
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