Pan Petroleum AJE Ltd v Yinka Folawiyo Petroleum Company Ltd and Others (Defendants/Appellants (First, Second and Fourth Defendants)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Flaux,Lord Justice Lewison,Lord Justice Gross |
| Judgment Date | 11 October 2017 |
| Neutral Citation | [2017] EWCA Civ 1525 |
| Docket Number | Case No: A3 / 2017 / 1527 |
| Court | Court of Appeal (Civil Division) |
| Date | 11 October 2017 |
[2017] EWCA Civ 1525
Lord Justice Gross
Lord Justice Lewison
and
Lord Justice Flaux
Case No: A3 / 2017 / 1527
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
MR JUSTICE KNOWLES
Royal Courts of Justice
Strand, London, WC2A 2LL
Rhodri Davies QC (instructed by Clyde & Co LLP) for the Appellants
David Joseph QC and Adam Board (instructed by Mildwaters Consulting LLP and Veale Wasborough Vizards) for the Respondent
Hearing date: 27 September 2017
Approved Judgment
Introduction
The first, second and fourth defendants ("the appellants") appeal, with the permission of Longmore LJ, against the Order of Knowles J dated 12 May 2017 which found the appellants to be in contempt of Court and granted declaratory relief to the claimant (to which I will refer as "Pan Petroleum"). The contempt found was that the appellants had breached paragraph 2.2 of the judge's earlier Order dated 20 January 2017 granting, inter partes, an interim injunction pursuant to section 44 of the Arbitration Act 1996.
The appeal is in a narrow compass and the only sanction for the contempt found by the judge was the declaratory relief granted.
History and background
The appellants and other defendants and Pan Petroleum are all parties to a Joint Operating Agreement ("the JOA") dated 21 September 2007 in respect of a Nigerian offshore oilfield called the Aje field. The field was originally explored by the first defendant (and appellant) in 1991. Oil was discovered and Oil Mining Lease no. 113 was granted to the first defendant by the Nigerian Government for 20 years in 1998. The Lease is due to expire in June 2018.
Pan Petroleum became a party to the JOA by novation and assignment agreements made in June 2010. It has a minority stake in the field, its Participating Interest being 6.502%. The first defendant is the Operator under the JOA, which also provides for a Technical Adviser which is Folawiyo Aje Services Ltd ("FASL"), a company associated with the first and second defendants.
Article 5 of the JOA provides for an Operating Committee to exercise powers and make decisions in respect of the joint operations. It has power to vote on and pass binding resolutions as to the drilling and development of new wells, as set out in the Development Plan prepared by FASL as Technical Adviser, which also has the duty to prepare budgets to be submitted to the Operating Committee for approval pursuant to voting procedures set out in the JOA. Those voting procedures vary according to the significance of the decisions being taken. Some decisions require a qualified majority of votes from the parties' representatives on the Operating Committee. Other decisions, as set out in Article 5.9.1, are of such significance that they require unanimous approval. One such is where there is a "major modification" to the Development Plan or to the budget for the operations. It is the interpretation and application of those provisions which gave rise to the dispute between the parties, summarised in more detail below. Once a budget prepared by FASL is approved by the Operating Committee, the JOA authorises FASL to issue "Cash Calls" to the parties. It is in dispute whether certain Cash Calls have been validly issued.
These disputed cash calls essentially relate to two proposed new wells Aje-6 and Aje-7. The original dispute concerned the decision to drill and establish a budget for Aje-6, which Pan Petroleum opposed on technical, economic and legal grounds. Pan Petroleum's position is that the decision was a "major modification" requiring unanimous approval of the Operating Committee. The defendants' case is that a qualified majority Pass Mark vote suffices.
On 4 and 5 September 2016, FASL put forward draft resolutions in relation to Aje-6 to establish a budget and raise funds for development of the well. At this stage, FASL had not put forward any proposal in relation to Aje-Pan Petroleum exercised its rights under the JOA to call for a general meeting of the Operating Committee which was set up for 5 October 2016. Before that meeting could take place, on 15 September 2016, FASL issued two Cash Calls requesting payment by Pan Petroleum on 3 October 2016. Cash Call 28 was described as a request for funds needed to meet the operational costs of the field, although the schedule included references to costs relevant to the disputed Aje-6 well. Cash Call 29 was described as a request for funds needed for 'project long lead items' for the development of both an undisputed 'Aje-5' well and the disputed 'Aje-6' well. Pan Petroleum's share of these Cash Calls was US$1,355,016.80 and US$975,300.00 respectively.
The draft resolutions in relation to Aje-6 went through a number of amendments, but the final draft presented to the joint venture parties on 3 October 2016 included the following:
"2. That the approval of the Operating Committee be given to establish a Development Budget for [2016] and 2017, in the amount of $40.4MM for D&C of Aje 6;
3. That the approval of the Operating Committee be given to establish a Development Budget for 2016 and 2017, to include $14.2MM for hookup of Aje6".
At the Operating Committee meeting on 5 October 2016, Pan Petroleum opposed the draft resolutions, in so far as they related to Aje-6, on the grounds that (i) any such resolution required unanimous consent of the parties and (ii) the drilling of the Aje-6 well was, in its view, premature and should only be carried out when the earlier wells in the field were fully functioning and better understood. Pan Petroleum voted against the resolutions, which were approved by all the other parties. The JOA contained a mechanism in Article 7.2 and 7.3 to deal with situations where a majority of parties consented to certain operations but others did not. The consenting parties could propose an Exclusive Operation and if that procedure were adopted, the consenting parties would then indemnify and hold harmless the non-consenting parties in respect of any costs and liabilities incurred incidental to such Exclusive Operation. Pan Petroleum's position was and is that that Exclusive Operation procedure has never been engaged by the appellants, so that Pan Petroleum is entitled to be involved in decisions of the Operating Committee in relation to Aje-6 and subsequently Aje-7. On 21 October 2016, FASL issued Default Notices addressed to Pan Petroleum requiring payment of the Cash Calls. Further Default Notices followed on 16 November 2016.
The provision of the JOA dealing with Default and its consequences is Article 8. Under Article 8.1, the Technical Adviser issues a Default Notice to the Defaulting Party. By Article 8.3 the Default Notice will also reallocate between non-defaulting parties, in proportion to their participations, the sums unpaid by the Defaulting Party. If the Defaulting Party fails to pay within 5 days, the non-defaulting parties must pay the reallocated sums or they will become Defaulting Parties.
If the Cash Call remains unpaid after the issue of a Default Notice, there are two successive consequences for the Defaulting Party. First, under Article 8.2, after 5 business days the Defaulting Party is excluded from the Operating Committee:
"8.2 Operating Committee Meetings and Data
Beginning five (5) Business Days from the date of the Default Notice, and thereafter while the Defaulting Party remains in default, the Defaulting Party shall not be entitled to attend Operating Committee or subcommittee meetings or to vote on any matter coming before the Operating Committee or any sub-committee until all of its defaults have been remedied (including payment of accrued interest). Unless agreed otherwise by the non-defaulting Parties, the Voting Interest of each non-defaulting Party during this period shall be its proportionate share, expressed as a percentage, of the total applicable Cost Bearing Participations of the non-defaulting Parties. Any matters requiring a unanimous vote of the Parties shall not require the vote of the Defaulting Party. …"
The second consequence of non-payment is that, under Article 8.4, after 45 days the Defaulting Party may be required to withdraw from the JOA and the Lease. The material parts of Article 8.4 provide:
"Remedies
8.4.1 During the continuance of a default, the Defaulting Party shall not have a right to its Entitlement [defined as "that quantity of Hydrocarbons which a Party has the right and obligation to take delivery pursuant to the Lease, Article 9 of this Agreement, and any applicable offtake agreement"] which shall vest in and be the property of the non-defaulting Parties. The Technical Adviser (or the notifying Party if the Technical Adviser is a Defaulting Party) shall be authorized to sell such Entitlement in an arm's-length sale on terms that are commercially reasonable under the circumstances and, after deducting all costs, charges and expenses incurred in connection with such sale, pay the net proceeds to the non-defaulting Parties in proportion to the amounts they are owed by the Defaulting Party hereunder (and apply such net proceeds toward the establishment of the fund under Article 8.4.3, if applicable) until all such amounts are recovered and the fund is established. Any surplus remaining shall be paid to the Defaulting Party, and any deficiency shall remain a debt due from the Defaulting Party to the non-defaulting Parties. When making sales under this Article 8.4.1, the non-defaulting Parties shall have no obligation to share any...
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