Masri v Consolidated Contractors International UK Ltd and Others (No. 2)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lloyd,Lord Justice Longmore,Lord Justice Tuckey,Lord Justice Lawrence Collins,Lord Neuberger of Abbotsbury,Lord Justice Ward,Sir Anthony Clarke MR |
| Judgment Date | 06 June 2008 |
| Neutral Citation | [2008] EWCA Civ 303,[2008] EWCA Civ 625,[2007] EWCA Civ 688 |
| Docket Number | Case No: 2006/2151,Case No: A3/2008/0082,2004 Folio 124 & 831 |
| Court | Court of Appeal (Civil Division) |
| Date | 06 June 2008 |
[2007] EWCA Civ 688
Lord Justice Tuckey
Lord Justice Longmore and
Lord Justice Lloyd
Case No: 2006/2151
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
MRS JUSTICE GLOSTER
Jonathan Hirst Q.C. and Simon Salzedo (instructed by Simmons & Simmons) for the Claimant Appellant
Mark Hoyle (instructed by LeBoeuf Lamb Greene MacRae) for the Defendant Respondents
Hearing date: 3 July 2007
Judgement
This appeal is against paragraph 1.3 of an order made by Mrs Justice Gloster dated 28 July 2006 after a 12 day trial. The appellant is Mr Masri, the Claimant in the proceedings. The Respondents are the Fourth and Fifth Defendants to the proceedings as originally constituted. Both are Lebanese companies, part of the Consolidated Contractors group of companies, which I will call the CCC group. The proceedings arise from an agreement made on 6 November 1992 between Mr Masri and (as the judge found) the two Respondents, under which Mr Masri is entitled to participate in profits from the Masila oil field in Yemen under a concession held by the Fourth Defendant (the First Respondent) and later transferred to the Fifth Defendant (the Second Respondent). I will refer to the Respondents collectively as CCC, and separately as CCIC and CCOG respectively.
The judge had to consider and resolve many questions arising from the dispute between the parties over the 1992 agreement. Most of them were decided in favour of Mr Masri. The Respondents appealed but, in circumstances which it is unnecessary to describe, their appeal has been struck out. Mr Masri applied for permission to cross-appeal. That application was directed to be heard with the main appeal, and for the cross-appeal to be heard at once if permission were granted. In the events which have happened the cross-appeal is all that remains for decision.
The judge's admirably clear judgment, [2006] EWHC 1931 (Comm), describes fully the issues she had to decide, and the facts relevant to the various transactions. I can be relatively brief in my summary for the purposes of the appeal.
The Masila block or concession in South Yemen was and still is the subject of an agreement dated 15 September 1986, called Agreement for Petroleum Exploration and Production, and referred to as the PSA. The parties were the Ministry of Energy and Minerals of the People's Democratic Republic of Yemen, Canadian Oxy Offshore International Ltd (CanadianOxy for short) and CCIC. It became binding on ratification by the Parliament of South Yemen on 15 March 1987. CanadianOxy was a subsidiary of Canadian Occidental Petroleum Ltd, itself a Canadian subsidiary of the US corporation Occidental Petroleum Corporation. CanadianOxy and CCIC were referred to together in the PSA as “the Contractor”.
The PSA gave the Contractor the exclusive right to conduct petroleum operations in the defined contract area during the term of the agreement. All such operations were at the Contractor's sole cost and risk, so that it could only look to its share of any eventual production to recoup costs and make a profit. It had six years for the initial exploration process. If it was able to declare Commercial Discovery within that time, the PSA would continue for a further 20 years. Otherwise it would terminate at the end of the six years.
Article 9 of the PSA dealt with the allocation of oil production, providing first that operating expenses, exploration expenditure and development expenditure should be recouped out of 40% of all Crude Oil produced in each year (and 50% of any Gas), referred to as Cost Recovery Petroleum. The principle and priority of such recovery was as follows. Operational expenses were recoverable in the financial year in which the expenses were incurred. Exploration expenditure was to be recovered at the rate of 25% per annum. Development expenditure was to be spread over 6 years. If in any year the total of these three exceeded the value of the Cost Recovery Petroleum for that year, the excess was to be carried forward to later years in turn. Oil produced in excess of that allocated for cost recovery in each year was governed by section 9.3, under which it was to be shared between the Contractor and the Ministry in graduated proportions. Up to 25,000 barrels per day of production was to be divided 2:1 between the Ministry and the Contractor. Higher levels of production were to be divided differently, with the Ministry's share increasing until, at more than 250,000 bpd, the ratio was 4:1.
As between them, CanadianOxy's and CCIC's rights and obligations were governed by a Joint Operating Agreement (JOA) which gave a 60% share to CanadianOxy and 40% to CCIC.
CCIC wished to avoid having to bear exploration costs, which could be very substantial, and would be incurred at a time when it was altogether uncertain whether there would ever be a commercial return on the expenditure. It achieved this by stages. The JOA made CanadianOxy responsible for the first $22.5 million of such expenditure, with CCC liable to reimburse $4.375 million of that amount, once the whole had been spent. Thereafter CanadianOxy was to bear 65% of exploration expenditure until commercial discovery was declared. Thus the burden of 5%, or one eighth of CCC's 40%, was borne by CanadianOxy from the start, but once the latter had spent $22.5 million CCIC would be liable to pay $4.375 million for the past and a continuing 35%.
In July 1990 CCIC entered into an agreement referred to as the Pecten farmout. Pecten (a US oil company controlled by Shell) agreed to take half of CCIC's 40% interest, and with it responsibility on a continuing basis for 20% of the exploration expenditure, in return for paying CCIC $16 million towards past and future exploration costs. That payment enabled CCIC to meet its liability to CanadianOxy as regards the $4.375 million. Then in July 1991 CCIC agreed a further farmout, with Occidental Yemen Inc (Oxy Yemen), another affiliate of the Occidental group. Under this agreement Oxy Yemen took half of CCIC's remaining 20% share under the PSA and the JOA. Oxy Yemen agreed to pay its own share of the exploration costs (10%), and to pay CCIC $4 million, plus 50% of CCIC's 10% share of the exploration costs up to commercial discovery, and all of its share of the exploration costs thereafter (except for those associated with development wells). Because, up to the declaration of commercial discovery, CanadianOxy was carrying 5% out of CCIC's (originally) 40%, by this second farmout CCIC had transferred to others the whole of its liability for exploration expenditure.
Mr Hirst showed us some figures produced by the CCC group in 1993 in connection with the syndicated loan agreement, to which I will refer later, which showed an anticipated payment to CCC in respect of exploration expenditure recovery, from which he submitted that, even though CCIC had shifted to others the liability for exploration expenditure, it had retained the right to keep part of the exploration expenditure recovery. So far as appears this entry was not the subject of attention at trial, and it would be dangerous to place reliance on it for any particular inference. In any event it is clear that, by July 1991, CCIC had been able to shift its liability for exploration expenditure, at a cost of limiting its participation to 10% of the concession. It remained exposed to development expenditure and operational expenses, but the latter would only arise once the concession was believed, and declared, to be commercially viable.
Mr Masri's participation in CCIC's interest in the concession arose from personal connections and from his involvement in Arab Bank plc (the Bank), a major international banking group. The Chairman of the Bank used to be Abdul Majid Shoman, who died in 2005. Hasib Sabbagh was a non-executive director of the Bank from 1979 to 2003, and he was replaced by Said Tawfic Khoury. Mr Masri has been a non-executive director and Deputy Chairman of the Bank. Mr Sabbagh and Mr Khoury were among the founders of the CCC group. That group was a customer of the Bank, and an important one. The judge explained at paragraph 22 of her judgment that Mr Masri's interest in the Concession reflected the fact that the CCC group regarded the support of the Bank and of Mr Shoman for the project as valuable, and as something which they wished to reward, and that Mr Shoman would not take any such benefit for himself but wished it to be passed to Mr Masri (see also paragraph 24 on the same point).
Detailed discussion of Mr Masri's participation in the concession started in 1991. After a meeting between Mr Sabbagh and Mr Masri in July 1991, a note was prepared which set out two choices of which one, as typed, was expressed as:
“1% of concession:—
(a) In this case C.C.C. would bear all the expenses of exploration. If oil is found commercially Munib Masri would share in 1% of the development cost.”
As the judge explained at paragraphs 43 and 44, two different versions of this document exist. In both of them a manuscript amendment has been made, altering the second 1% figure to 1.5%. In one of them the first 1% has also been changed to 1.5%. The judge held that the first of these two reflected the agreement reached on that occasion, and that Mr Masri had altered the first 1% later, but she said that he had not...
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