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The Implication of Terms - Relational Contracts, Good Faith and the Braganza Duty

10 March 2020
In the recent case of TAQA Bratani Limited and others v Rockrose UKCS8 LLC [2020] EWHC 58 (Comm), the English court provided clarity on whether the Braganza Duty and a duty of good faith (under a relational contract) could be implied into the terms of Joint Operation Agreements ("JOAs"). Specifically, the court considered whether a non-operator's unqualified right to terminate the operator's appointment should be fettered.

Introduction

TAQA Bratani Limited, TAQA Bratani LNS Limited, JX Nippon Exploration and Production (U.K.) Limited and Spirit Energy Resources Limited (the "Claimants") filed a claim against Rockrose UKCS8 LLC (the "Defendant"), seeking declarations from the court as to whether their termination of the Defendant's operatorship was valid and lawful. 

Background

The dispute concerned the Brae Fields in the UK Continental Shelf in the North Sea. The Claimants and the Defendant were party to four JOAs and one Unitisation and Unit Operating Agreement, whereby the Defendant was appointed as operator of five oil and gas fields. The Claimants, in accordance with the terms of the JOAs, were entitled to discharge the Defendant from its role as operator, subject to the majority of the operating committee voting to such effect and providing the Defendant with at least 90 days' notice. 

The Claimants, in compliance with their contractual obligations, served the Defendant with notice of discharge, providing the Defendant with 365 days to handover the operations of the Brae Fields. Nevertheless, the Defendant rejected the notice on grounds that it was not valid and that it acted against industry practice. Moreover, the Defendant argued that such decision to transfer the operatorship did not comply with the Claimants' implied duty to: (i) act in good faith; and (ii) not to terminate the contractual arrangements between the parties improperly, arbitrarily and/or irrationally (i.e. the Braganza Duty). 

Therefore, the Court was asked to consider whether the Defendants arguments were valid. 

Defendant's Argument

Firstly, the Defendant relied upon the Braganza Duty, arguing that termination of the JOAs was limited by an implied duty of good faith and that such power must be exercised without capriciousness, perversity or irrationality.

Secondly, the Defendant further argued its position that termination of the JOAs must be effected in accordance with good faith and not arbitrarily or improperly as the termination of relational contracts (which the Defendant argued the JOAs were) was subject to an implied duty of good faith.

Claimants' Argument

The Claimants argued that the termination provisions of the JOAs provided them with express and unqualified rights to terminate the contractual relationship, free from any implied duty. The Claimants also argued that whilst the JOAs were long-term contracts, a duty to act in good faith should not automatically be implied, and on the contrary, such contracts should be construed applying conventional contractual principles.

Judgement

The High Court held that the termination provisions incorporated in the JOAs established absolute and unqualified rights to terminate the Defendant. Therefore, the court found that the Braganza Duty, or the duty to act in good faith, did not limit or restrict the Claimants' contractual right or discretion to discharge the Defendant as operator. 

The court reached this decision on grounds that it was not required to imply such terms of good faith to the termination provisions of the JOAs to achieve business efficacy or in order to attain what was so clear and obvious that it went without saying. 

The court did not apply the Braganza Duty, stipulating that it was not applicable to unqualified termination provisions which had been negotiated between well-resourced and sophisticated parties. The court held that the application of the Braganza Duty to the JOAs "would be an unwarranted interference in the freedom of parties to contract on terms they choose", which ultimately would have significant repercussions on English contract law. 

Whilst the court considered that the JOAs, arguably, could be considered relational contracts, the court emphasised that this did not inevitably impose a duty of good faith onto the parties. On the contrary, the court held that the termination provisions were constructed to provide an absolute and unqualified power, and as such, the implication of qualifying terms was contrary to the intention of the parties and therefore rejected. 

Conclusion

While recent case law has highlighted a nexus between relational contracts and the duty to act in good faith, in order for such duty to be implied, the courts require a high threshold to be met. As highlighted in this case, while parties to long term contracts need to be cognisant that a duty of good faith may be implied, the implication of such duty should not be assumed as to apply to all relational contracts.

In its decision, the court delivered a clear message that where parties incorporate provisions into their agreements which grant the right to terminate the agreement, such clauses will be interpreted in accordance with their express terms. 

Points to Note

  1. Participants of JOAs governed by laws other than English Law, such as US Law or civil laws, may be more prone to the implication of a duty of good faith or fair dealing, and as such, should take the necessary steps to address this expressly in the underlying agreements. 
  2. The judgment of this case highlights that parties to a JOA, irrespective of their status as joint participants, are permitted to act in their own commercial interest, provided this is in compliance with the contractual framework of the JOA. Such parties are not required to contractually "collaborate" beyond the terms expressly contained in their JOAs. 
  3. The courts will consider whether the parties are sophisticated, well-resourced, and whether the contract is clear, has been professionally drafted and negotiated before implying terms into any such contracts. Moreover, as seen in Bates & Ors v Post Office Limited [2019], the courts will also consider the balance of strength and equality between the parties in deciding whether an implication of terms is necessary. 

Further Reading

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