By Nkaepe Lisk-Carew
(With respect to the first and second installments of this paper) All the above-mentioned cases can be reconciled in the fact that there must be a transfer of a proprietary or possessory right which may be in land or personal property. Celestial Aviation provides a three stage test which would assist the courts in establishing whether or not jurisdiction should be granted. Therefore the first question should be whether the forfeiture involves the transfer of a proprietary or possessory interest in the JOA. Willoughby suggests that the JOA is essentially contractual but that does not preclude the interest from being proprietary.[1]
One view expounded by Willoughby, is that a JOA creates a beneficial interest in the PL under a trust. Since the PL gives the co-venturers a right to take and carry away the hydrocarbons from land which belongs to another (e.g the H), this amounts to a profit-a-prendre which is an interest in land (being an incorporeal hereditament) according to section 205(1)(ix) of the LPA (Law of Property Act) 1925. This may be too simplistic. Unlike concessions, most PSA’s, even the hydrocarbons extracted still belong to the HC. The parties to the JOA then receive a specified share of oil as a reward. [2] Surely this is not a profit-a-prendre. This model does not cover situations of service agreements where the co-venturers have no interest in the oil but are only entitled to a fix fee.
Willoughby goes further to explain that the LPA expressly excludes an undivided share in land. The interest in the PL is indivisible as the PL does not allocate a specified share to each licensee. This would make the licensees joint tenants. In Willoughby’s opinion, only Oliver LJ’s reasoning in Sport International stands contrary to extending jurisdiction to commercial cases. Willoughby argues that since Cooper v. Critchley said that the interest of a tenant in common was an interest in land for the purposes of section 40 LPA 1925, and this view was re-affirmed in Elias v. Mitchell, then the interest of the co-venturers is an interest in land. It is submitted that this conclusion is a bit of a stretch. Unlike joint tenancy, tenancy in common is a divisible interest in land and therefore does not fall foul of the exclusion of the LPA. Therefore it is difficult to see how the rulings in Cooper and Elias assist this view.
An alternative propounded by Willoughby is that the JOA is a wholly commercial venture which is separated from the PL. Although the JOA cannot be carried on without the PL it is nothing more than the sine qua non of the JV. Therefore a co-venturers right to receive a percentage share of the profit from production is merely a contractual right and not a proprietary interest.[3] Therefore according to the cases discussed above, there would be no jurisdiction to grant relief against forfeiture as even the ruling in BICC would preclude relief in the context of mere contractual rights. [4] However following BICC and Celestial Aviation, rights in a JOA to a PI (Percentage Interest) are arguably possessory interests albeit in personal property and may fall within the jurisdiction of relief from forfeiture.
In the event that jurisdiction to grant equitable relief is founded on the fact that the JOA is a proprietary interest, then the next question in Celestial Aviation would have to be addressed (being whether forfeiture is to secure the payment of money. There is currently no case that has dealt with this specific question in relation to JOAs. Prima facie, forfeiture remedy was designed to ensure prompt payment of cash calls. Therefore it arguably secures the payment of money. However, another objective of the forfeiture clause is to allow the non-defaulting members to re-arrange their funding so as not to rely on the defaulter for future payments. Willoughby argues that the objective of cash calls in a JOA is similar to the objective in Scaptrade. It was relevant in that case, that the claimant needed funds in advance to fulfill its duties under the charter. The operator in a JOA also needs payment in advance to fund the joint operations.[5]
With regards to whether ‘the same result can effectively be attained when the matter comes before a court’, it is considered that the same result would not be achieved. Any judgment would result in payment after the event which would not remedy the damage caused by the delay and disruption of default. With regard to matters of policy, it is considered that Hamblen J’s view is preferable. The parties to a JOA are most often of equal bargaining strength and the transaction is often at arm’s length. If such parties enter into commercial transactions then they should be bound by the bargain that they have made. It is therefore a matter of policy that there should be certainty in such transactions.
Finally, in the event that the approach in Celestial Aviation is reversed by a higher court, then the jurisdiction would be a matter of jurisdiction as suggested by Hamblen J. Regard will be had to the conduct of the defaulter for instance, whether the co-venturer is a persistent defaulter or who has had ‘cavalier disregard’ of its obligations.
Some practical considerations that the co-venturers should consider when including a forfeiture clause in the JOA is that the defaulting party must remain liable for past costs, confidentiality and non-compete obligations. Further, there may be a change of control provision in other related contracts which may terminate them if the parties to the JOA change. Despite forfeiture, the defaulter still remains named on the PL. Also, forfeiture may not be the panacea for all default. It may be practically impossible to forfeit the interest of an NOC or indigenous party in jurisdictions where local content is mandatory.
In practice the risk of a forfeiture clause being struck down by the courts is small because the only relief which the courts will be willing to grant is to give the debtor to time to pay his debt. The time period is arguably provided by most JOAs as forfeiture is often the ultimate sanction when default remains unremedied.[6]
CONCLUSION
In conclusion contractual provisions can be put in place to deal with the possibility of default in a JOA. These include withering clauses, buy-out provisions, suspension of rights, Lien over each party’s joint venture interest given by each party in favour of the operator with the ultimate sanction being forfeiture of the defaulting party’s interest where default remains unremedied.
However the situation with the forfeiture provision is precarious because of issues with enforceability. As well as being unenforceable where the provision is found to be penal or where there as issues of insolvency, the defaulter may also be granted relief from forfeiture.
The case law has moved from a position where only interests in land could be granted relief from forfeiture, to where the courts will now grant relief even if the interest is in personal property. The only condition is that the interest must be possessory or proprietary and not a mere contractual license.
With regard to the implication for interests in JOAs, it is unlikely that relief from forfeiture will be granted because although the PI is a proprietary interest, the amount in default is arguably not a sum to secure the payment of rent and the same result could not be attained by going to court. In order to avoid the expense of litigation brought about by the defaulter seeking relief from forfeiture, the issues with forfeiture may be altogether avoided by using a buy-out provision and granting a lien over the co-venturers property to enable the sale of the defaulter’s PI.
NUTSHELL:
In the course of this analysis Nkaepe has shed light on Joint Operating Agreements by focusing on default provisions and relief from forfeiture. According to her, under a JOA default occurs when a party breaches its financial obligations and fails to make a payment due following a cash call. There are usually provisions in the JOA which aim to discourage default. Forfeiture is one of such provisions. This paper thus taken a critical look at the enforceability of forfeiture provisions in light of relief from forfeiture and provided valuable insights. What are the practicalities in your host country? Do share...
[1] See WILLOUGHBY G Supra Note 18
[2] Ibid
[3] Ibid
[4] Ibid
[5] Ibid
[6]See GORDON G et al., Supra note 15 at 298
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