JOINT ventures are an essential component of the oil and gas industry.
They enable massive risks and capital expenditure to be defrayed across multiple partners, meaning that projects which otherwise may not be bankable can be undertaken.
Naturally, before parties enter into a joint venture they carefully negotiate and document the terms upon which they intend to govern their relationship, either in a joint operating agreement (where an unincorporated joint venture is established) or a shareholders’ agreement (in the incorporated joint venture context).
While lawyers and commercial teams will try to cater for all potentialities, it is not possible for parties to adequately draft the documentation to deal with all of the issues that may arise during the life cycle of the project.
Furthermore, during the life of the project, the law itself may depart from the position which informed the parties when they were negotiating, with such changes impacting on how the documents may subsequently be interpreted and applied.
Understanding recent decisions relating to joint ventures, and how they may impact existing joint ventures and future negotiations of agreements, is critical to commercial teams and legal practitioners alike.
Beyond the four corners of the agreement
In general, the courts when dealing with commercial agreements are reluctant to superimpose duties and obligations outside of the deal struck by the parties.
However, this is not to say that the courts will never exercise such jurisdiction in the joint venture context.
Recent cases indicate that operators and joint venturers need to be aware of the potential for fiduciary duties to arise as a result of their relationship.
While the case law continues to indicate that even if a fiduciary relationship is deemed to exist between the parties, its scope and extent will be limited to those obligations arising from the contract itself, there remains scope for the courts to expand the potential application of these duties if special circumstances were to apply.
In addition, recent case law regarding the payment of dividends should be a reminder for participants in incorporated joint ventures that while their shareholders agreement and other constituent documents will be the paramount source of their obligations, other statutory and common law duties, rights and obligations may also regulate their relationships.
Maintaining a holistic view of your relationship taking into account the terms of the applicable agreements, statutory and common law rights is a constant requirement.
Issues in exercising pre-emptive rights
Given the close commercial relationships that are incumbent in the joint venture context, participants generally have a right, exercisable on the proposed exit by one participant, to acquire the exiting participant’s interest in the joint venture before any sale of that interest to a third party.
These are referred to as ‘pre-emptive rights’ or ‘rights of first refusal’. Pre-emptive right provisions generally incorporate certain conditions that must be satisfied before any sale to a third party may proceed.
Pre-emptive rights are triggered on a proposed sale of the interest in the joint venture itself but may also be exercisable when there is a ‘change of control’ of a participant.
In a number of recent cases, the scope of and compliance with pre-emptive rights provisions has been challenged by non-selling participants seeking to hold outgoing participants to the requirements of their agreements.
The key learnings for commercial and legal advisors alike from these cases is, firstly, that strict compliance with the terms of existing provisions is required in order to avoid potential challenges.
Secondly, in drafting such clauses careful consideration be given to how they will be played out in practice, and where there is potential for ambiguity this must be dealt with in the drafting to minimise any potential disputes in the future.
As “joint venture jurisprudence” is primarily constituted by contract law, most decisions forming part of this body of law are examples of the application of contractual interpretation principles.
As such, whilst decisions may be informative as to how to draft documents, they may not be directly applicable to your agreement.
What recent decisions do clearly indicate is that parties must be cognisant of their contractual obligations.
If there is any ambiguity (or perceived ambiguity) it is prudent to seek legal advice as to the proper interpretation of a provision before undertaking a course of action.
Alternatively, or in parallel to legal review, engaging with your joint venture partners and seeking confirmation in writing as to an agreed course of action may mitigate any risks.
Lastly, as joint ventures require close ongoing commercial relationships by nature, there may be more to gain by employing an inclusive approach than taking a view (that may be robust) that may end up with the parties in a dispute which will have longer lasting implications for the joint venture as a whole.