Apache North Sea Ltd v Euroil Exploration Ltd & Anor

Farm-out agreements are used in the oil and gas industry across the world. They borrow their name from historical practices in the agricultural sector where undertaking work on farmland would entitle a person to a legal or beneficial interest in that land. A farm-out agreement operates as a type of sale and purchase agreement under which a seller agrees to transfer part (but not all) of its interest to the buyer in exchange for that buyer agreeing to undertake (or fund) work obligations such as acquiring seismic data or drilling wells in respect of that asset. In the context of the oil and gas industry, the upstream "asset" being transferred is usually an interest in a licence, production sharing contract, or other concession, granted by a government to a company to explore for and produce oil and gas.

Farm-out agreements do not typically exist in a vacuum. Where there is more than one owner, the parties will regulate their relationship in relation to that asset under a joint operating agreement. Farm-out agreements need to take account of and interact appropriately with those joint operating agreements to avoid inconsistencies and minimise the prospect of dispute. This appeal arises out of a dispute relating to the interaction between a farm-out agreement and a joint operating agreement.

The Appellant, Apache North Sea Limited ("ANSL"), entered into a Farm-Out Agreement dated 19 February 2015 (as amended and restated on 16 July 2015) with the First Respondent, Euroil Exploration Limited ("EEL"), for the sale and purchase of minority interests in respect of two UK Continental Shelf seaward production licences and participation in associated joint operating agreements ("the FOA"). The relevant licence for present purposes is Licence P. 1998 ("the Licence") and relates to an area described as "Val d'Isere" ("the Licence Area"). By way of consideration, under clause 2 of the FOA, EEL agreed to pay ANSL (subject to the terms of the FOA and in accordance with the provisions of clause 3.1 of the FOA) a price consisting of a proportion of ANSL's historic incurred survey and licence costs ("Back Costs") and 26.25% of ANSL's total costs (other than "Back Costs") including for drilling the well in the Licence Area.

The relevant associated (Val D'Isere) Joint Operating Agreement was deemed to be in full force and effect immediately for the purpose of the FOA even though, as was always anticipated, it was only executed subsequently (on 22 July 2015) ("the VJOA").

The Second Respondent, Edison SPA ("Edison"), is EEL's ultimate parent company and agreed to be guarantor of EEL's payment obligations under the FOA (as primary obligor and not merely as surety) under a Deed of Guarantee and Indemnity entered into with ANSL dated 19 February 2015 ("the Deed of Guarantee").

As set out in more detail below, ANSL drilled an exploration well in the Licence Area ("the Earn-In Well") with a drilling rig leased on a long-term basis at various fixed daily rates ("the rig"). Whilst these rates may have been favourable against the market at times, they were significantly in excess of the market rates prevailing at the time of drilling.

In a judgment dated 6 December 2019 ("the Judgment") HHJ Pelling QC (sitting as a judge in the High Court) ("the Judge") held that the total costs of drilling recoverable by ANSL and payable by EEL under the FOA were capped by reference to what they would have been if incurred at market rate (relying in particular on clause 3.1 of the FOA, clause 6.2.2 and the Accounting Procedure in Schedule 1 of the VJOA). The question for this court is whether he was right to do so.

On ANSL's construction of the FOA, ANSL is entitled to payment of £3,280,482.46

ANSL contends that the Judge failed to apply the express language of a contractual definition in the FOA negotiated by sophisticated commercial parties and drafted by the expert legal advisers. EEL contends that the Judge's construction was correct essentially for the reasons that the Judge gave. Edison adopted EEL's position on all issues, as it did before the Judge.

ANSL is a company incorporated in England and a subsidiary of Apache Corporation, a US oil and gas company. EEL is also an English company in the same group of companies as Edison, an Italian company, both being ultimately owned and controlled by Électricité de France.

The Licence was issued by the Secretary of State for Energy and Climate Change and dated 17 September 2013. It allowed ANSL either to drill one well or to elect to allow the Licence to cease. By letter dated 9 December 2014 ANSL elected to drill.

As set out above, ANSL and EEL then entered into the FOA on 19 February 2015 in respect of the Licence (and also another licence, Licence P. 2001, relating to an area described as "Les Arcs"). The VJOA was deemed to be in full force and effect immediately for the purposes of the FOA and was subsequently executed on 22 July 2015. The Deed of Guarantee was entered into on the same day as the FOA. Edison's liability for the Earn-In Costs under the Deed of Guarantee was "limited to an amount equal to fifty million Euro (€50,000,000)".

On 4 November 2016 ANSL entered into a Farm-In Agreement in relation to the Licence with a third-party company (ultimately named DNO Exploration UK Limited ("DNO")). DNO became a party to the VJOA by deed of novation dated 13 July 2017. Thereupon the percentage interests under the VJOA were held as follows: ANSL 60%; DNO 22.5%; EEL 17.5%.

The rig used by ANSL was the "WilPhoenix" semi-submersible rig which had been leased by ANSL from Awilco Drilling plc since 12 August 2013 under a hire contract for the provision for a mobile semi-submersible drill rig unit. Thunderclouds relating to the use of the rig gathered early on. Thus, having been notified in October 2016 that ANSL intended to use the rig, EEL emailed ANSL on 17 November 2016 setting out the basis for its objections to such use, maintaining that ANSL either had to proceed with a tender process or limit the costs charged to the prevailing market rates. EEL maintained that position throughout the months that followed.

In the event an Authorisation for Expenditure Form was issued and approved (under clause 9.8 of the VJOA) by ANSL on various dates between 18 July and 15 September 2017 and by DNO on 4 October 2017, expressly authorising the use of the rig at the daily rate actually incurred by ANSL ("the AFE") and the rig was deployed. EEL accepts that the AFE was issued contractually but contends that it was invalid for the failure to follow the Accounting Procedure in the VJOA.

The drilling commenced on 19 December 2017 and continued until 3 February 2018. During that period the rate payable for the rig under the hire contract (of US$382,404 per day) exceeded the market rate for an equivalent rig (of US$130,000 per day) significantly.

The Earn-In Well was found to be dry, with hydrocarbons in economically producible quantities not being located. EEL did not exercise its option (under clause 3.1.8 of the FOA) to acquire a further 7.5% interest in the Licence. The operation was wound up.

ANSL sent EEL a Reconciliation Statement dated 13 June 2018 under clause 3.1.3 of the FOA, showing £3,280,482.46 as the balance due. EEL refused to pay, maintaining that ANSL was only entitled to payment for the cost of the rig by reference to the rate prevailing for similar equipment to the rig over the material period. EEL admitted liability for payment by reference to market rates (although it did not make any such payment (in whole or part) until after the commencement of the proceedings and three days prior to the case management conference on 16 May 2019).

Given the nature of the issues raised, it is necessary to set out the relevant clauses of the FOA and the VJOA in detail (as contained in the Appendix to this judgment). The key clauses of the FOA and the VJOA as referred to by the parties are, however, repeated here for ease of reference.

Recitals B and C provided:

Clause 1 contained the following key definitions:

Clauses 2 and 3 provided materially:

Clause 19 contained what has been described as an “inconsistency clause”:

ANSL was the "Operator" under the VJOA. Key provisions of the VJOA are as follows:

Interests of the Participants

Authorities and Duties of the Operator

Responsibilities

The Operator shall:

conduct the Joint Operations in a proper and workmanlike manner in accordance with Good Oilfield Practice;

conduct the Joint Operations in compliance with the requirements of the Acts, the Licence and any other applicable Legislation;

do or cause to be done, with due diligence, all such acts and things within its control as may be necessary to keep and maintain the Licence in force and effect; and

save as may otherwise be expressly provided under this Agreement (including the Accounting Procedure), neither gain nor suffer a loss in such capacity as a result of acting as Operator in the conduct of Joint Operations.…

Commitments for Material and Services

In connection with work to be carried out pursuant to an approved Programme and Budget or AFE:

subject to clause 6.5.2(b) the Operator, or any Affiliate of the Operator, may supply necessary Material and services whether owned, leased or otherwise, from its own resources and shall charge the costs to the Joint Account in accordance with the Accounting Procedure;

Costs and Accounting

The Accounting Procedure

Purpose and Intent

The purpose of this Accounting Procedure is to define the responsibilities and procedure for accounting for the financial transactions relating to this Agreement.

It is intended that the Accounting Procedure is fair and equitable as regards the charges, income, losses and gains attributed to the Joint Account, and to their apportionment amongst the Participants, and as regards the rights of the Participants on the disposal of assets and surplus materials. It is further intended that the Operator shall neither gain nor suffer any loss as a result of acting as Operator. The Participants agree that if any Participant considers that the methods described herein are materially inequitable, the Participants shall meet and in good faith endeavour to agree on changes in methods deemed appropriate to correct any inequity. For the avoidance of doubt, any changes made to the Accounting Procedure shall be subject to unanimous approval of the Participants or, where expressly so provided, by decision of the Joint Operating Committee.

The Operator shall charge and credit the Joint Account for all costs and receipts properly and necessarily incurred to conduct Joint Operations in accordance with the principles set out in this Accounting Procedure and, if the Joint Operating Committee so determines, with the Standard Oil Accounting Procedures issued by Oil and Gas UK from time to time ("SOAPs") in effect on the date on which the transaction is charged or credited to the Joint Account provided that in the event of any conflict between the SOAPs and this Accounting Procedure, this Accounting Procedure shall prevail and in the event of a conflict between the provisions of the Accounting Procedure and the provisions of the Agreement, the Agreement shall prevail.

Subject to the necessary Budget and AFE being approved in accordance with clauses 10 to 14 (as applicable), expenditures properly and necessarily incurred to conduct Joint Operations from and after the effective date of this Agreement as set out in clause 2.1 shall be charged to and paid by the Participants in proportion to their respective Percentage Interests. The Operator may, in accordance with the Accounting Procedure, Invoice the Participants Monthly in respect of all expenditures to be borne by the Participants incurred pursuant to this Agreement provided, however, that other frequencies and procedures for invoicing may be approved by unanimous decision of the Participants from time to time.

Accounting Basis

The Operator shall open and maintain such separately identifiable accounting records as may be necessary to record in a full and proper manner all Invoice and Advance payments received by the Operator from each Participant and all expenditure incurred and all Receipts obtained by the Operator in connection with the Joint Operations.

Subject to the necessary Budget and AFE being approved in accordance with clauses 10 to 14 (as applicable), the Operator shall charge and credit the Joint Account on the basis of its accounting policies in effect on the date on which the transaction is charged or credited to the account for all the costs and income properly and necessarily incurred and received in accordance with this Agreement, including:

the cost of services, equipment, and/or facilities owned, partly owned, leased or hired by the Operator or its Affiliates and used on behalf of the Joint Account, which shall be charged at rates commensurate with the cost of ownership. The rates shall not exceed rates currently prevailing for like services, equipment and/or facilities if provided by non-affiliated third parties;

Having set out the facts, the parties' respective cases and the relevant applicable principles of construction, the Judge reasoned (in summary) as follows:

Accordingly, the Judge dismissed ANSL's claim.

Mr Allen QC for ANSL submits the central thesis that the FOA and the VJOA are entirely different contracts with different mechanisms and purposes and separate parties, with the FOA having primacy in the event of any inconsistency. The FOA is a bilateral sale contract with a price agreed which the purchaser is liable to pay. The JOA on the other hand is a multilateral joint venture contract with a joint venturers' account. ANSL wears different hats at different times, depending on which contract is being considered. Under the FOA it is the seller, whilst under the VJOA it is the operator and a participant. The multiple references to the VJOA in the FOA do not mean that the accounting rules in the VJOA are imported into the FOA.

The effect of the Judgment is thus said to be impermissibly to incorporate a joint venture accounting convention in a multilateral joint operating agreement into a bilateral farm-out sale and purchase agreement so as to reduce the price there agreed. That is said to be a "unique proposition" unsupported by any previous authority and a significant development for the oil and gas industry, given that joint operating agreements are attached routinely to farm-out agreements by way of appendix.

ANSL submits that the Judge's decision to apply the Accounting Procedure in the VJOA was reached without proper regard to the express language of the FOA and was unsustainable on its own terms, in summary for the following reasons:

The well-known principles of contractual construction are to be found in a series of recent cases, including Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900; Arnold v Britton and others [2015] UKSC 36; [2015] AC 1619 and Wood v Capita Insurance Services Ltd [2017] UKSC 24; [2017] AC 1173. No issue is taken with the Judge's summary of the law at [13] and [14] of the Judgment.

In Arnold v Britton and others (supra) Lord Neuberger identified the relevant legal principles as follows:

Seven factors were then emphasised, of which five are relevant for present purposes:

“17.

First, the reliance placed in some cases on commercial common sense and surrounding circumstances (eg in Chartbrook [2009] AC 1101 , paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.

18.

Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve.

19.

The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. Judicial observations such as those of Lord Reid in Wickman Machine Tools Sales Ltd v L Schuler AG [1974] AC 235, 251 and Lord Diplock in Antaios Cia Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191 , 201, quoted by Lord Carnwath JSC at para 110, have to be read and applied bearing that important point in mind.

20.

Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party.

21.

The fifth point concerns the facts known to the parties. When interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time the contract was made, and which were known or reasonably available to both parties…”

Thus the court is concerned to identify the intention of the parties by reference to what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean. It does so by focusing on the meaning of the relevant words in their documentary, factual and commercial context. That meaning has to be assessed in the light of the natural and ordinary meaning of the clause, any other relevant provisions of the contract, the overall purpose of the clause and the contract, the facts and circumstances known or assumed by the parties at the time that the document was executed and commercial common sense, but disregarding the subjective evidence of the parties' intention. While commercial common sense is a very important factor to be taken into account, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed. The meaning of a clause is usually most obviously to be gleaned from the language of the provision. Where the parties have used unambiguous language, the court must apply it; if there are two possible constructions, the court is entitled to prefer the construction consistent with common sense and to reject the other (see Rainy Sky (supra) at [21] and [23]).

In Wood v Capita Insurance Services Ltd (supra) at [9] to [11]) Lord Hodge JSC described the court's task as being to ascertain the objective meaning of the language which the parties have chosen to express their agreement. This is not a literalist exercise focused solely on a "parsing of the wording of the particular clause"; the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. The interpretative exercise is a unitary one involving an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences investigated.

ANSL refers to two particular further authorities:

As for "inconsistency" clauses such as clause 19.1 of the FOA, the court must first decide whether, objectively, there is a conflict. It is not enough that one term qualifies or modifies the effect of another. To be inconsistent a term must contradict another term or be in conflict with it, such that effect cannot fairly be given to both clauses, or the clauses cannot sensibly be read together (see Pagnan SpA v Tradax Ocean Transportation SA [1983] All ER 565 at 574 - 575). So consideration needs to be given not merely to whether or not there is a literal contradiction but whether there is such a contradiction having regard to issues of reasonableness and business common sense (see Alexander v West Bromwich Mortgage Company Limited [2016] EWCA Civ 496; [2017] 1 All ER 924 at [41]. There will be inconsistency where one clause in one document emasculates another clause in another document.

In circumstances where these sophisticated parties represented by experienced lawyers could undoubtedly have expressed their agreement on the question of recoverable Earn-In Costs as construed by the Judge more clearly, ANSL's submissions hold some initial attraction. The words "total costs" in the definition of the Val D'Isere Earn-In Costs in the FOA may point towards the absence of a cap by reference to market rates. But whether or not that is so depends upon the FOA as a whole.

As the Judge indicated, the proper construction of EEL's payment obligation falls to be determined on the basis of the documents themselves. No relevant factual or commercial context is relied on by the parties. The FOA and the VJOA are to be interpreted principally by textual analysis unless a provision lacks clarity or is apparently illogical or incoherent.

I reject at the outset the central premise of ANSL's submissions, namely that the FOA and the VJOA are to be treated as entirely separate contracts, with ANSL wearing different hats in each. That presents as an ex post facto theoretical argument that does not reflect the true nature of the parties' dealings at the time.

By the time that the FOA was executed, the terms of the VJOA, including the Accounting Procedure, had been negotiated; by clause 3.3.1 of the FOA they were to be deemed to be in full force and effect before and after completion of the FOA. The two contracts were part of a package and fall to be read together. This is reflected not only in the definition of "the Agreement" in the FOA (which expressly included the Schedule containing the VJOA) and in the definition of the Earn-In Well (being the well to be drilled “pursuant to the [VJOA] by the Operator”) but also in the plethora of references throughout the FOA to compliance with the provisions of the VJOA (see for example clauses 3.1.2, 3.1.3, 3.1.4. 3.3.1, 3.3.2, 4.1 and 4.2). The suggestion that the FOA is an entirely separate and self-contained agreement does not sit with the parties' express agreement for issuing AFEs, invoicing and payment under the FOA

Nor did ANSL identify itself at the time as wearing two different hats, as seen in the fact that it is defined in the FOA as being "the Operator". It drilled the Val D’Isere Earn-In Well as Operator under both the FOA and the VJOA and it was in that capacity that it would be incurring drilling costs.

This is not to "merge" the two contracts, as ANSL suggested, but rather to construe them in their proper context as a cohesive whole.

Against the above, I turn to the proper construction of the precise clauses in question.

By clause 2.1 of the FOA EEL was to pay the Earn-In Costs "subject to the terms of this Agreement" and "in accordance with the provisions of clause 3.1…" The Earn-In Costs were defined as the Les Arcs Earn-In Costs and the Val D'Isere Earn-In Costs. The Val D'Isere Earn-In Costs were defined (in the event that the Val D'Isere Option was not exercised) as 26.25% of the total costs (other than the Back Costs) in relation to the Earn-In Well, whensoever incurred, and in respect of all works undertaken pursuant to the Well Programme in connection with the Earn-In Well including drilling. The definition is consistent with clause 4 of the VJOA which speaks, amongst other things of how "all costs…incurred" are to be apportioned between the participants.

As indicated, ANSL submits that clause 3 related only to the mechanics of payment. But that submission does not withstand the words of clauses 3.1.2 and 3.1.3 where in each case the invoice from ANSL was to be not only "within the applicable time periods as set out in the relevant JOA" but also "in accordance with the relevant JOA". Clause 3 was not just about when and how, but also what. It determined the amount to be paid in respect of the Val D'Isere Earn-In Costs. Further, whilst the heading to clause 3 of "Determination …of Earn-in Costs" must be ignored as an aid to construction (because of clause 1.3 of the FOA), EEL can legitimately point to clause 12.8 of the FOA which refers to "the reimbursement by [EEL] pursuant to Clause 3 of this Agreement".

Thus clause 2 (and the definition of Val D'Isere Earn-In Costs) did not, in my judgment, determine the amount to be paid without more. It identified what costs ANSL could recover but not necessarily in what sum. Payment was to be made "in accordance with the provisions of clause 3.1". Clause 3.1 would be the obvious place to look for any limitations on the payment obligation; the absence of reference to any limitation in the definition of Earn-In Costs would not be surprising (so, for example, a definition of costs payable can be unqualified with the obligation to pay nevertheless being limited to payment of a fair proportion (see for example Ground Rents v Dowlen [2014] UKUT 0144 (LC); [2014] 3 EGLR 7)).

I do not consider in this context that Recital B or the words "whensoever incurred" in the definition of Val D'Isere Earn-In Costs can bear the heavy weight attached to them by ANSL. Recital B is "on and subject to the terms and conditions of the Agreement". It correctly reflects the fact that EEL is to pay "certain costs" that would otherwise be borne by ANSL. What those "certain costs" are must be found elsewhere. The words "whensoever incurred" correctly reflect the fact that ANSL is entitled to recovery of costs (whenever) incurred. The word “whensoever” appears to be a timing point, although I accept that it is not clear what the timing issue was. (It perhaps reflected the fact that the Upfront Payment was in respect of anticipated costs.) As for the word “incurred”, there is of course no suggestion that ANSL is entitled to costs that it has not incurred. An entitlement to such recovery does not preclude the application of a cap on what can be recovered in respect of those costs (incurred).

Clause 3.1.1 repeated EEL's obligation to pay the Earn-In Costs. It also referred to EEL's ongoing obligation to pay under the relevant JOA and/or the Earned Interests. Clause 3.1.2 provided for payment by EEL of the Upfront Payment, which was a quantified lump sum of £5million. Whilst the Upfront Payment was not a concept contractually linked to the VJOA, it was nevertheless to be applied by ANSL towards payment of the Earn-In Costs following receipt of a corresponding AFE, cash call or invoice "issued by [ANSL] in accordance with the relevant JOAs within the applicable time periods as set out in the relevant JOAs". Further, by clause 3.3.1 AFEs in respect of Earn-In Costs were specifically to be issued "pursuant to and in accordance with the relevant JOAs…". The Upfront Payment was to be paid into the Joint Account (as defined) by virtue of paragraph 1.3 of the Accounting Procedure. As a matter of consistency, one would expect the remainder of expenditure to be paid by EEL also to be treated in accordance with the relevant JOAs.

Clause 3.1.3 addressed the issuing of a Reconciliation Statement by ANSL, for which there could be many reasons (for example, late or incomplete invoicing). The parties were then to discuss and agree the Reconciliation Statement "taking into account any items which may be the subject of dispute with the Operator under the JOA". In the event of such dispute, that dispute was to be resolved between the parties "in accordance with the JOA". Again, although the Reconciliation Statement was not a process within the VJOA, the point is that in the event of a dispute as to the amount to be paid under it, such dispute was to be resolved under the VJOA and the parties agreed to abide by the result.

Clause 3.1.4 is central for present purposes. It provides for EEL to pay the Earn-In Costs "upon receipt of "an invoice" from [ANSL] "in accordance with the relevant JOA within the applicable time periods as set out in the relevant JOA". The only invoice for the purpose of the VJOA is an "invoice presented for payment by the Operator to a Participant in accordance with the provisions of the Accounting

Before turning to paragraph 3.2.4 itself, it is helpful to consider the VJOA and the Accounting Procedure in a little more detail.

By paragraph 1.3 of the Accounting Procedure, the Operator was mandated to charge and credit the Joint Account for all costs and receipts "properly and necessarily incurred to conduct Joint Operations in accordance with the principles" set out in the Accounting Procedure. The FOA provided that the Earn-In Well was to be drilled by the Operator – a joint operation - under the VJOA. Thus ANSL as Operator was obliged to charge the costs of drilling the Earn-In Well, a joint operation, to the Joint Account.

It was intended under the VJOA that the Operator should neither gain nor suffer any loss as a result of acting as Operator (see clause 6.2.2(d) of the VJOA and clause 1.2 of the Accounting Procedure). The VJOA recognised that the Operator might wish to supply its own resources for the conduct of joint operations (at clause 6.5.2 of the VJOA) - but the Operator nevertheless had to charge the drilling costs to the Joint Account in accordance with the Accounting Procedure. Those costs (if incurred by the Operator) had to be costs incurred by the Operator when acting as Operator (not as a private supplier). The "no loss, no gain" principle only applied to the Operator's activities qua operator (although the very fact that the cost of equipment leased or hired by the Operator could be capped at all shows that in its capacity as supplier of equipment the Operator could make a loss); it did not prevent the Operator suffering a loss in a personal capacity.

Once the effect of paragraph 1.3 of the Accounting Procedure in particular is understood, it is easy to see how paragraph 3.2.4 of the Accounting Procedure is apt to apply to payment by EEL of Earn-In Costs under the FOA.

The purpose of the Accounting Procedure, which by clause 16 of the VJOA formed part of the VJOA, was to define the responsibilities and procedure for the financial transactions relating to the VJOA. It was intended to be "fair and equitable as regards the charges, income, losses and gains attributed to the Joint Account".

Paragraph 3.2 provided that, “subject to the necessary Budget and AFE being approved … the Operator shall” charge and credit the Joint Account on the basis of its accounting policies" "for all the costs and income properly and necessarily incurred and received in accordance with this Agreement, including:….

Thus there was a market rates cap on what the Operator could charge for the supply of its own resources. It was permitted to charge for such supply but on a basis limited by reference to market rates. This can be seen to produce a "fair and equitable" result, ensuring that the Operator is compensated fairly for the value of what it has supplied, whilst also protecting the participants by ensuring that the chargeable costs are confined to those properly and necessarily incurred and by reference to market rate.

ANSL points to the fact that EEL's interest under the VJOA was only 17.5%, and not 26.25%, being the proportion of the total Val D'Isere Earn-In Costs that EEL agreed to pay under the FOA. I do not see that this difference undermines EEL's construction of the FOA, not least since EEL was also purchasing an interest in the Licence under the FOA. It was not entering only into the VJOA. It was agreeing under the FOA to pay up to £3.5million more towards the future costs of the Earn-In Well than it would have done simply under the VJOA. (Under the FOA EEL agreed (in addition to “Back Costs”) to pay 26.25% (50% more than its 17.5% interest under the VJOA) of the Val D'Isere Earn-In Costs up to the first £40million incurred by the Operator, namely £10.5million; on the basis of a 17.5% contribution it would have been required to pay up to only £7million.)

EEL does not dispute that it is obliged to pay 26.25% of the Val D'Isere Earn-In Costs under the FOA (which has primacy over the VJOA by reason of the inconsistency clause (19.1) in the FOA). The real question is how the "total costs" of which EEL agreed to pay 26.25% are to be measured. The percentage difference in the allocation does not cause the "costs incurred" in the definition of Val D'Isere Earn-In Costs and to be paid in accordance with clause 3.1 of the FOA to be construed differently from costs "properly and necessarily incurred" and to be charged under the Accounting Procedure in the VJOA (including paragraph 3.2.4).

ANSL submits that paragraph 3.2.4 cannot apply because it is concerned with charges to a joint account, not payments to an individual entity. But it can be seen that there is nothing counter-intuitive in the Val D'Isere Earn-In Costs going through the Joint Account procedure in paragraph 3.2 of the Accounting Procedure. The simple point is that the Earn-In Costs to which ANSL was entitled under clause 2 of the FOA always had to be charged to the Joint Account under paragraph 1.3 of the Accounting Procedure. What is charged to the Joint Account affects, albeit indirectly, what is charged to each participant.

This construction also meets the problem of potential exposure on the part of EEL to double-payment under the FOA and the VJOA. If it were right to treat the Earn-In Costs payable under the FOA as entirely separate and distinct from the costs incurred for the purpose of clause 3 of the Accounting Procedure in the VJOA, then EEL would be potentially liable to pay the same costs twice: an item of expenditure necessarily and properly incurred in accordance with the Val D'Isere Well Programme and so falling to be charged to the Joint Account under the VJOA could also fall within the definition of Earn-In Costs in the FOA. DNO would receive a windfall. Mr Allen suggested that the solution then would be the inconsistency clause (19.1) in the FOA, but that is not an obvious solution to the problem.

ANSL asks rhetorically why the limit on the Deed of Guarantee (of €50million) would be so high if there was a cap on what could be recovered by way of Earn-In

My conclusions are reinforced (rather than driven) by the fact that EEL's construction is not in any way commercially implausible or unworkable. In return for a share of the Licence, EEL agreed to bear 8.75% of costs that would otherwise be borne by ANSL. (Footnote: ¹) By contrast, ANSL's construction can be said to lead to the very uncommercial proposition whereby EEL would have agreed to take on an open-ended exposure under the FOA by reference to costs incurred by ANSL over which it had no meaningful control.

For these reasons, and despite the clear and skilful manner in which ANSL's position has been advanced, I would uphold the dismissal of the claim, broadly for the same (though not identical) reasons as the Judge.

In these circumstances it is not necessary to consider the further matters raised in the Respondents' Notice dated 13 March 2020 as an alternative basis for upholding the Judgment. EEL wished to argue that the "total costs…incurred" were not ANSL's incurred payments under the lease for the rig, but rather costs at a level "no more than the loss of the use of the rig for other drilling operations which might have been scheduled for the same time" or at the level of "the price which a third party might have paid to sub-lease [the rig] from [ANSL]".

In any event, I would not have permitted EEL to advance such a contention: it was not put forward as a positive line of defence before the Judge (for which no good reason has been identified) and would have raised significant new factual issues, such as what other drilling operations might have been scheduled at the same time and the economic cost of the loss of use. It would not have been fair or appropriate to allow EEL to rely on it for the first time on appeal.

Further, EEL sought permission to appeal against the costs order made by the Judge. The Judge ordered the Respondents to pay ANSL's costs of the action up to 16 May 2019, to be assessed if not agreed, and the Claimant to pay the Respondents' costs of the action thereafter to the conclusion of the trial, again to be assessed if not agreed. It will be remembered that 16 May 2019 was the date of the case management conference and that a few days earlier, on 13 May 2019, EEL had paid over the sums which were on its case due to ANSL.

The Judge exercised his discretion in this manner on the basis that ANSL had been forced to commence proceedings in order to recover anything from EEL at all. ANSL was successful down to the date when EEL agreed to pay what it was liable to pay as opposed to insisting on a judgment. It was not obviously the case that the costs exclusively attributable to that part of the claim that was conceded by EEL were trivial or overwhelmed by the costs attributable to the issue on which ANSL ultimately failed. An issue-based costs order (limiting the costs in favour of ANSL to those attributable to the element of the claim on which EEL paid out) would be impracticable. In any event such an order would ignore a dispute between the parties as to when interest under clause 11.2 of the FOA ran. That dispute remained live throughout the trial and was resolved in ANSL's favour.

Permission to appeal the costs order was refused at the full appeal hearing. There was no real prospect of appellate interference with the Judge's exercise of discretion (and no other compelling reason for an appeal against the costs order to be heard). The Judge had presided over the trial, understood the merits of the parties' positions, been referred to interparty correspondence and appreciated the significance of the payment ultimately secured by ANSL. He had ruled in ANSL's favour on the question of interest (against which ruling there is no appeal), stating at [42] of the Judgment that it had been open to EEL to make a payment on account if necessary: the fact that EEL was not in a position to work out what sum was due until much later was immaterial. The costs decision was "pre-eminently a matter for the discretion of the trial judge " (see Britoil plc v Hunt Overseas Oil Inc [1994] CLC 561 at 575); it could not be said that it "exceeded the generous ambit within which reasonable disagreement is possible" (see Tanfern v Cameron-MacDonald [2001] 1 WLR 1311 at [32]).

I would therefore dismiss the appeal. I emphasise that this conclusion is a contractspecific one. I reject ANSL's submission to the effect that it would have any industrywide impact by setting a general precedent. Neither the FOA nor the VJOA was on a standard or model form; rather each was bespoke. The proper construction of a farmout agreement and analysis of its interplay with an associated joint venture agreement will always turn on the precise terms of agreement between the parties.

I agree.

I also agree.