Adamantine Energy (Kenya) Ltd v Bowleven (Kenya) Ltd

The Claimant (“Adamantine”) and the Defendant (“Bowleven”) are each privately owned companies set up to exploit oil and gas opportunities in Kenya. This is a dispute between them as to whether Adamantine is entitled to acquire from Bowleven a 50% participating interest in Block 11B as a result of a drill or drop vote on 25 February 2015.

On 30 May 2012 Adamantine entered into a Production Sharing Contract with the Government of Kenya in respect of Block 11B (“the PSC”). Block 11B comprised an area of about 14,200 square kilometres in Northern Kenya, bordering South Sudan and Ethiopia, which was largely unexplored; it had had approximately 50 line kilometres of 2D seismic data conducted in the 1980s and had no wells drilled.

The PSC provided for the exploration phase to be divided into three periods. The Initial Exploration Period was two years, starting 90 days after execution of the contract (the “IEP”), which was when Adamantine was obliged to commence exploration operations (clauses 2(1) and 2(2)). During the IEP Adamantine was obliged to expend a minimum of US$10 million and to carry out minimum work obligations comprising (a) acquisition and interpretation of full tensor gradient (FTG) and magnetic data and (b) acquisition of 500 km line of 2D seismic data (clause 4(1)(a)). At the end of the IEP Adamantine had the option to proceed to a first additional exploration period of a further two years (“the 1AEP”); in order to do so it had to make a written application to the Minister of Energy not later than one month prior to the expiry of the IEP, which the Minster was obliged to grant if Adamantine had fulfilled its minimum work and expenditure obligations in the IEP (clause 2(3)). In that event Adamantine was obliged to surrender to the Government 25% of the block of its own choosing (clause 3(1)). During the 1AEP Adamantine was obliged to expend a further minimum of US$25 million and to carry out further minimum work obligations comprising (a) acquisition of a further 500 km line of 2D seismic data and (b) drilling an exploratory well to a minimum depth of 3,000m at a cost of US$20 million (clause 4(1)(b)). If no extension of the IEP were granted in accordance with the PSC, the contract expired automatically (clause 2(6)). If at the end of the IEP or 1AEP Adamantine had failed to fulfil its minimum work or expenditure obligations during the period, Adamantine was obliged to pay the shortfall to the Government (clause 4(8)).

At the end of the 1AEP, similar provisions applied for the potential extension into a Second Additional Exploration Period (“2AEP”) for a further two years (clause 2(4)), during which further minimum expenditure and work obligations would arise.

At the beginning of each exploration period Adamantine was obliged to post a guarantee (half by bank guarantee and half by a parent company guarantee) for the full minimum work and expenditure obligations for the forthcoming period (clause 4(7)).

Under a Sale and Purchase Agreement dated 14 September 2012 (“the SPA”) Adamantine assigned a 50% participating interest in the PSC to Bowleven in return for Bowleven’s agreement to carry the minimum cost of the exploration phases. Bowleven’s carry obligation was for the minimum expenditure required under the PSC for each exploration period, above which the costs would be shared jointly between Adamantine and Bowleven (clauses 2.1 to 2.4). They also entered into a Joint Operating Agreement dated 12 October 2012 (the “JOA”) which provided that Adamantine would be the Operator during the IEP; it was envisaged that Bowleven would become the Operator thereafter if they moved into the additional exploration periods. The JOA provided for a management committee comprising a nominated representative and alternate representative of each party, whose procedures were governed by clause 5.

Clause 8 of the SPA was the so called “drill or drop” provision which regulated the process and consequences of a decision by the parties as to whether to proceed to the next exploration period. In essence it provided that no later than 3 months prior to expiry of the existing exploration period there should be a management committee meeting at which each party should vote whether it wished to proceed to the next exploration period. If both wished to do so, the one month notice would be given to the Government under clause 2(3) or 2(4) of the PSC. If neither wished to do so, Adamantine was to give notice to the Government to relinquish all interest in the block. If one party wished to proceed into the 1AEP or 2AEP when the other didn’t, the withdrawing party was obliged to assign its 50% participating interest to the other at no cost. If Bowleven voted to withdraw, it remained liable to pay its carry in the current exploration period but not for the new additional exploration period(s).

Clause 8 was in the following terms:

“8.

DRILL OR DROP

8.1

Not later than three (3) months before expiry of each Exploration Period (or any extension thereof pursuant to Clause 2.5 of the PSC), [Adamantine] and [Bowleven] shall hold a meeting of the Management Committee pursuant to Clause 5 of the JOA at which the Parties shall discuss, in good faith, and then vote on whether they jointly wish to proceed into the next Exploration Period and also the portion of the Contract Area to be surrendered pursuant to Clause 3 of the PSC.

8.2

If the Parties agree to proceed into the First Additional Exploration Period or the Second Additional Exploration Period (as applicable), [Adamantine] shall give notice to the Government, on behalf of the Parties, of their intention to do so pursuant to Clause 2.3 or 2.4, respectively, of the PSC and [Bowleven] shall, not less than one (1) month prior to the expiry of the then current Exploration Period, deliver to [Adamantine] (i) a Bank Guarantee for fifty percent (50%) of the value of the Phase 2 Work Programme or Phase 3 Work Programme, as applicable (as set out in column 3 of Schedule A); and (ii) a PSC PCG Guarantee for the remaining fifty percent (50%) in value of such applicable Work Programme.

8.3

If the Parties both agree that they do not wish to proceed into the First Additional Exploration Period or the Second Additional Exploration Period, as applicable, [Adamantine] shall give notice to the Government, on behalf of the Parties, of their intention to relinquish the PSC in its entirety.

8.4

If either Party votes against proceeding into the next Exploration Period, but the other Party votes to proceed, the other Party may require, at any time thereafter before the expiry of the then current Exploration Period, the first Party to assign its fifty percent (50%) Participating Interest in the PSC for nil consideration. The first Party shall sign a deed of assignment, in similar terms to the Assignment, together with such other documents as may be necessary to effectively transfer the first Party’s fifty percent (50%) Participating Interest in the PSC to the other Party or its nominee. The first Party shall meet any taxes payable in respect of such transfer.

8.5

If [Bowleven] elects not to proceed into the next Exploration Period, [Bowleven] shall have no obligation to provide the Adamantine Carry for that Exploration Period, or to meet the PSC Costs in respect of any subsequent Exploration Period. [Bowleven] shall however remain liable to pay the Adamantine Carry for the then current Exploration Period or, if expended, for its share of any approved and budgeted costs in excess of the relevant Adamantine Carry until the expiry of the then current Exploration Period.”

The Phase1, Phase 2 and Phase 3 Work Programmes referred to are defined in Schedule A and correspond, so far as material to the current dispute, with the minimum work obligations undertaken to the Government in the PSC for the IEP, 1AEP and 2AEP respectively.

The IEP was due to expire on 28 August 2014. By December 2013 it was clear to Bowleven and Adamantine that although the acquisition of the FTG and magnetic data would be completed within the period, the 2D seismic data acquisition would not. Accordingly an application was made to the Ministry on 3 December 2013 for a 12 month extension of the IEP. On 31 March 2014 the Ministry granted a 9 month extension of the IEP, which would then expire on 26 May 2015.

The parties agreed that the effect of the Ministry extension of the IEP was to postpone the date for the drill or drop vote pursuant to clause 8 of the SPA, notwithstanding that clause 8 of the SPA referred only to extensions of an Exploration Period “pursuant to Clause 2.5 of the PSC”, which by its terms was inapplicable to extensions of the IEP. The last day for a drill or drop vote under clause 8 of the SPA therefore became 25 February 2015 (three months prior to 26 May 2015, a month being defined in the SPA as a period of 30 days, not a calendar month).

There were then delays in concluding a contract with the subcontractors chosen to carry out the 2D seismic work, Tesla Exploration International Ltd (“Tesla”), and with Tesla’s mobilisation and deployment of the necessary equipment and personnel.

In a paper prepared for Bowleven’s board on 13 October 2014, Mr Willett and Mr Newell recognised that the delay meant that they would not have the seismic results completed and analysed in time to inform their decision whether to move into the next exploration period. Bowleven had farmed out 30% of its own participating interest to First Oil on terms which required a consultation and decision making process to be held with First Oil a month before the Adamantine/Bowleven drill or drop vote. It was by this time clear that analysis of the results would not be available before the end of January 2015, when the decision with First Oil would have to be taken. Indeed Mr Newell’s estimate was that the interpretation of the data, and identification of drill targets, would not be complete until the end of March 2015. In an email to Adamantine of 17 October 2014, Mr Newell reported his estimates of completion of the work and the contractual timetable, which confirmed 26 February 2015 as the management committee meeting date for a drill or drop vote.

The internal board paper suggested that Bowleven should seek from Adamantine an extension of the date for the drill or drop vote. It appears from an email from Mr Bridgman of Adamantine on 20 November 2014 that an extension was requested, but in that email Mr Bridgman reiterated that Bowleven had until 26 February 2015 to elect to move into the next phase. There was no agreed extension at that stage.

At the end of November 2014 there was a telephone call between Mr Moore of Adamantine, and Mr Wilson and Mr Willett of Bowleven, to discuss the seismic operations and the drill or drop decision. Mr Willett mentioned that he was concerned that there would not be enough information for Bowleven to know whether or not to proceed to the 1AEP. Mr Moore said that the Adamantine Board understood the risks involved with early stage frontier exploration and that decisions often had to be made without a complete data set; and that Adamantine was prepared to move into the 1AEP on the current data. Mr Willett understood Adamantine to be saying that it would go ahead with a drill or drop decision in February 2015 because the information it had was sufficient although imperfect.

On 5 December 2014 Mr Willett emailed Adamantine to summarise recent discussions about seeking an extension of the IEP from the Government. The suggestion was that once 100km of seismic data had been acquired, and they had a clear view on the scheduling of the remaining exploration programme for the period, an application should be submitted to the Ministry for an extension; and that in the meantime, the Ministry should be kept briefed on the progress they were making. Mr Bridgman responded on 9 December 2014 agreeing with that approach to a time extension.

On 3 January 2015 there was a serious attack by disaffected locals at the camp in Eikicheles in the Kotome Basin which Tesla personnel had established on site preparatory to carrying out the seismic work. The camp was abandoned and Tesla thereafter refused to resume operations save on terms which Adamantine and Bowleven regarded as unjustified and non contractual. Accordingly it was determined by Adamantine and Bowleven that Tesla’s contract should be terminated.

As a result it became apparent to both parties by the middle of January 2015 that the minimum work obligation and expenditure in respect of the 2D seismic work which was required to be completed in the IEP was not going to be completed before the expiry of the IEP on 26 May 2015. In calls in the first two weeks of January it was agreed between Adamantine and Bowleven that a time extension should be sought from the Ministry to extend the IEP.

At a meeting with the Ministry on 15 January 2015 attended by Mr Bridgman and Mr Ngaya of Adamantine and Mr Stacey of Bowleven, Adamantine explained its plight surrounding the events of 3 January 2015 and the evacuation by Tesla. The Ministry personnel were embarrassed and sympathetic; however no request for an extension of the IEP was made at that meeting.

On 21 January 2015 there was a meeting at Bowleven’s offices in Nairobi, attended by Mr Bridgman and Mr Nyaga of Adamantine and Mr Willett and Mr Stacey of Bowleven. It was agreed that the Tesla contract would be terminated, and that an application should now be made to the Ministry for a further 15 month extension of the IEP.

There was a conflict in the evidence as to whether there was discussion at that meeting about the drill or drop vote. Mr Bridgman’s evidence was that there was such a discussion, and that he made it clear that Adamantine was keen to press ahead and would be voting yes at the forthcoming management committee meeting at which a vote would be taken; and that Adamantine was keen for Bowleven to vote yes as well. The evidence of Mr Willett and Mr Stacey was that there was no discussion of a drill and drop vote, although it is accepted that Mr Bridgman said that Adamantine was committed to the block. No reference to a drill or drop vote is recorded in the notes of the meeting made by Mr Willett, or in his email summarising the meeting internally the following day. I prefer the evidence of the Bowleven witnesses that there was no such discussion.

On 6 February 2015 a formal application for a 15 month extension of the IEP was submitted by Adamantine to the Ministry.

On 9 February 2015, Adamantine gave notice for a management committee meeting to take place on 25 February 2015 and sent an agenda. Item 2 on the agenda was a discussion and vote pursuant to clause 8 of the SPA on whether the parties wished to proceed into the 1AEP and if so what portion of the contract area was to be surrendered pursuant to clause 3 of the PSC.

On 13 February 2015, Mr Stacey of Bowleven met Mr Ngaya in Nairobi. As Adamantine’s local man on the ground, Mr Ngaya was responsible for liaising with the Ministry in order to keep Adamantine’s extension application in the Ministry’s mind and obtain feedback as to whether it would be granted. His assessment of the prospects of the application being granted, as conveyed to Mr Stacey, was that the Ministry was sympathetic but no one was giving any clear signal as to whether it would be granted.

On 18 February 2015, Mr Cassidy, Bowleven’s Head of Legal and Commercial, responded to Adamantine’s agenda for the management committee meeting by proposing that the drill or drop discussion and vote be deleted from the agenda because “the Joint Venture is not in a position to make such a decision at this stage”.

On 25 February 2015 the management committee meeting took place by phone and was recorded. There is no dispute as to the accuracy of the transcript, or as to what was said. It can be summarised as follows:

In a follow up email sent by Mr Willett later the same day, Bowleven said:

“…..[the] work obligations under the [PSC] have not been fulfilled by [Adamantine]. Accordingly, as [Adamantine] is unable in terms of the [PSC] to enter into the [1AEP] , further to clause 8 of the [SPA], Bowleven votes “no”, if no time extension for a minimum of 12 months is received from the Government of Kenya, provided that, if a time extension for a minimum of 12 months is received from the Government of Kenya, the earlier vote of “no” is void as irrelevant and the Parties shall hold the relevant meeting to discuss and vote whether to proceed into the [1AEP], 3 months prior to the new expiry date.”

It is to be noted that this vote by email differs in its conditionality and effect from that expressed orally at the meeting. In both cases it is a no vote if there is no extension. But in the event of an extension (in the email one of a minimum of 12 months) the email vote purports to postpone the drill or drop decision until the end of the extended period, whereas the vote expressed by Mr Cassidy at the meeting appeared to be an irrevocable yes if it should turn out that an extension was granted. Bowleven’s case, was that they were intended to be the same, and that what was said at the meeting was intended to convey what was set out more fully in the email. In other words if an extension were granted, Bowleven was not giving a present commitment to going into the 1AEP; rather, in the event of an extension there should be a further vote three months before the expiry of the extended period.

The rollover suggestion made by Mr Moore at the meeting of seeking to move the unperformed IEP work into the 1AEP had not been discussed between the parties before. There had been some discussion in 2013 and 2014 of the desirability of bringing forward the further 500kms of seismic data acquisition so as to do all 1,000kms in the IEP, because even 1,000kms of data was recognised as being a relatively small amount, in a territory of this size and nature, upon which to base an informed decision as to whether to proceed and where to drill an exploratory well. But that was a different commercial proposal from Mr Moore’s suggestion of rolling the initial 500kms of seismic data acquisition from phase 1 into phase 2. The latter would involve committing to an exploratory well on the basis of less seismic data, whereas the previous suggestion of moving phase 2 work into phase 1 was designed to achieve the opposite effect of maximising the data available before committing to an exploratory well.

Adamantine and Bowleven’s interests would not necessarily have been aligned in a rollover of the kind suggested by Mr Moore, as Mr Willett testified. The position reached by 25 February 2015 was that the great majority of Bowleven’s carry of US$10 million for the phase 1 work had already been expended, and the budget for completion of the phase 1 work was some US$17.6 million. Under the existing arrangements, costs in excess of US$10 million for the IEP work would be borne 50/50, but if the work were rolled into the 1AEP, the existing SPA terms would envisage Bowleven having a fresh carry obligation to pay 100% of the costs in the new period up to the cap. It seems to me that such a variation to the PSC would have necessitated a revisiting of the SPA terms agreed between the parties, which did not address the allocation of risk and reward which would arise in such revised circumstances.

Following the meeting, Adamantine maintained its position that Bowleven should be treated as having voted no, and was obliged to transfer its participating interest pursuant to clause 8.4 of the SPA.

In the event the Ministry granted a further 12 month extension to the IEP by letter of 6 May 2015, such that the IEP now expires on 26 May 2016.

On 9 June 2015 Adamantine brought these Part 8 proceedings for an order that Bowleven transfer its 50% participating interest.

Adamantine maintains that a valid drill or drop vote was held; that Bowleven is to be treated as having voted no; and that Bowleven therefore was and remains required to transfer its 50% participating interest to Adamantine pursuant to clause 8.4 of the SPA.

There are essentially five strands to Bowleven’s case:

There is an abundance of recent high authority on the principles applicable to the construction of commercial documents, including including Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896; Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988; Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101; Re Sigma Finance Corp [2010] 1 All ER 571; Rainy Sky v SA v Kookmin Bank [2011] 1 WLR 2900; Arnold v Britton [2015] AC 1619 and Marks & Spencer PLC v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] 3 WLR 1843. It is sufficient for present purposes to quote paragraph 15 of Lord Neuberger’s judgment in Arnold v Britton:

“When interpreting a written contract, 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”, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions. In this connection, see Prenn [1971] 1 WLR 1381, 1384-1386; Reardon Smith Line Ltd v Yngvar Hansen-Tangen (trading as HE Hansen-Tangen) [1976] 1 WLR 989, 995-997, per Lord Wilberforce; Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, para 8, per Lord Bingham of Cornhill; and the survey of more recent authorities in Rainy Sky [2011] 1 WLR 2900, paras 21-30, per Lord Clarke of Stone-cum-Ebony JSC.”

The starting point in construing clause 8 is that the vote which it contemplates is a vote on whether to invoke rights under clause 2(3) of the PSC. Although the wording of clause 8.1 involves a vote on “whether [the parties]…wish to proceed into the next Exploration Period”, this is not simply a decision on whether to proceed into a further exploration period in principle or in the abstract. Exploration Period (capitalised) is a defined term in the SPA, defined as bearing the same meaning as in the PSC. In the PSC “Exploration Period” is defined by reference to the IEP, 1AEP and 2AEP. The 1AEP is defined as meaning “the additional period of two (2) Contract Years after the Initial Exploration Period pursuant to sub-clause 2(3)…” (emphasis added). The decision required by clause 8 of the SPA is whether to enter into 1AEP, as defined in the PSC, by invoking the rights under clause 2(3). This is reinforced by the terms of clause 8.2 of the SPA which links the voting decision required by clause 8.1 to the invocation of rights under the PSC in two ways. First, in the case of a yes vote, it requires Adamantine to give the notice to the Government under clause 2(3). Secondly, in such case it obliges Bowleven to provide the guarantees which equate to the guarantees which clause 4(7) of the PSC obliges Adamantine to post at the beginning of the 1AEP. These are both obligations which arise one month before expiry of the IEP as the automatic result of a yes vote.

It was common ground that there is only a right to move to the 1AEP under clause 2(3) of the PSC if the minimum work and expenditure obligations have been fulfilled by the end of the IEP (leaving aside any consideration of waiver or contrary agreement by the Government, to which I shall return). It is inherent in the architecture of the PSC and the SPA that three months prior to expiry of the IEP there may be uncertainty as to whether such rights will exist. Clause 2(3) of the PSC requires notice to be given only one month before expiry. The minimum work and expenditure obligations do not have to be fulfilled until the end of the period itself. It must always have been envisaged as a possibility that the minimum work and expenditure obligations would be completed in the last three months of the period. In such circumstances clause 8 nevertheless requires a vote on whether to invoke such rights as will exist under clause 2(3) of the PSC, if any. If it turns out that none exist because the work does not get done in time, a yes vote will not enable Adamantine to invoke existent rights. But there is in those circumstances an important commercial purpose to be served by requiring a vote to cater for the contingency that such rights may arise and be capable of being invoked. If one party wishes to invoke the rights under the PSC to move into the next Exploration Period, it needs to know what the position of the other party is in order to undertake forward planning. It may well need to arrange finance, and that may involve farming out part of its interest, which requires certainty as to whether that will be 50% or 100%. The evidence established that this need for forward planning was the commercial rationale for requiring a vote three months prior to expiry. This applies as much to the situation where it is contemplated that the rights may exist in three months time as where it is known that they will.

Although clause 8.1 talks of the vote being called “not later than” three months before expiry, it is in my view clear (and was not in dispute) that it is not required to take place until the end of that period. It is obviously desirable, although not inevitable, that both parties should have the results of analysis of the data collected in one Exploration Period to inform the decision whether to proceed to the next. That is why under the PSC and the SPA the exploration stage is divided into three periods, with the option for the participants to proceed or walk away at the end of each period. In deciding whether to move into the 1AEP, the parties would want to have considered, to the fullest extent compatible with the need for forward planning, not only the overall prospects of commercial exploitation of the Block, but also where to concentrate the further seismic exploration to be conducted in 1AEP; where an exploratory well might be situated; and what part of the block to give up as its 25% relinquishment. Although the data collected in the IEP might not provide clear answers to all the questions, nevertheless the decision as to whether to move into the 1AEP is intended to be informed by an analysis of the data collected in the IEP. It is true that there may arise circumstances in which a party may have to make that decision on incomplete data, because clause 8 requires a decision three months prior to the expiry of the IEP, whereas the notice only has to be given one month before expiry and the work only has to be completed by the end of the IEP. But the commercial imperative behind the clause is that each party should have the maximum opportunity to assess the existing data before being required to make the drill or drop decision consistent with the countervailing desirability of commercial certainty in having a vote three months before expiry to allow forward planning. Clause 8 is therefore to be construed as obliging a party to vote only at the end of the period ending three months before expiry of the IEP. That was how the parties treated it in this case.

What is contemplated as being required by clause 8 is not, therefore, simply a vote on whether to invoke such rights under clause 2(3) of the PSC as may exist at some indefinite point in the future. It is a vote on whether to invoke such rights as may exist under clause 2(3) of the PSC three months later by giving a notice two months later.

It follows that there can be no requirement for a clause 8 vote at a time at which there is known to be no realistic possibility of invoking rights under clause 2(3) of the PSC arising three months later. There can be no valid or meaningful vote on whether to invoke rights which it is known will not exist.

That was the situation between Adamantine and Bowleven on 25 February 2015, so far as concerned the prospective existence of such rights three months later. Both parties knew, and expressly recognised in their discussions at the meeting, that no rights arose under clause 2(3) unless the minimum work obligations had been completed. Both parties knew that there was no realistic prospect of completing the IEP seismic data acquisition required under the terms of the PSC by 26 May 2015. The position would be different if there had been a real possibility of the minimum work obligation being completed by 26 May 2015, such that a notice one month earlier might give rise to a right to move into the 1AEP pursuant to the clause 2(3) notice. If such a possibility had been in prospect on 25 February 2015, Adamantine would have been entitled to a drill or drop decision so as to be able to make the forward planning arrangements during the following three months for that contingent eventuality. But if, as was the case, there was no such realistic possibility, there was no contingent eventuality of an effective clause 2(3) notice to be considered.

It is true that a right to enter into the 1AEP might arise thereafter if the Government were to grant an extension; but should it do so, there would be no requirement for a vote until three months before the end of the extended period. If, as in this case, clause 2(3) rights could only arise, if at all, after 26 May 2015 as the result of a Government extension, the time had not yet arisen for a vote should that contingency occur thereafter. This might give rise to conceptual difficulties as to knowing when a drill or drop vote was required in the event of an extension of less than three months. But in the circumstances of this case, an extension of less than three months was not a real possibility, so that there would always be a known further opportunity for a clause 8 vote three months prior to expiry of the extended period if an extension were granted.

The commercial consequences of the rival constructions support this conclusion. As Mr Hickey accepted in his final submissions, Adamantine’s construction has the consequence that if Bowleven had voted yes, then in the event of an extension of time by the Government both parties would immediately have been irrevocably committed to moving into the 1AEP at the end of the extended period without a further vote, and without reference to the results of the data collected during that period. This is the effect of clause 8.2 which is mandatory in requiring a clause 2(3) notice in the event of a yes vote. Additionally they would have to decide irrevocably, at that initial stage, which 25% of the block to surrender, again without further vote or reference to the results obtained in the extended period. This would cut across the primary purpose of seeking an extension of time, which is not merely to keep the participation alive, but to maximise the opportunity for the parties to have the benefit of the IEP data collection in order to inform their decision whether to move into the 1AEP and what portion of the block to relinquish. Bowleven’s construction, on the other hand, gives effect to this purpose whilst not undermining the forward planning rationale for a drill or drop vote three months in advance of moving into the next Exploration Period in the knowledge of whether the other party will participate. The position known to the parties on 25 February 2015 was that if the Government did not grant an extension, there would be no 1AEP to move into; and if it did, there would be an opportunity for a drill or drop vote three months before the expiry of the extended period which would allow Adamantine time for forward planning should Bowleven then wish to withdraw but Adamantine wish to exercise its rights under clause 2(3) to move into 1AEP on its own or with new farm out partners.

Of course it would always be open to Adamantine to seek to vary the PSC by agreeing different terms with the Government, other than an extension, at some time before expiry of the IEP. When the inability to fulfil the minimum work obligation under the IEP before 26 May 2015 was identified at the 25 February meeting as precluding any rights under clause 2(3), Mr Moore’s suggestion was of a negotiated rollover of the IEP work into the 1AEP. That was not specifically what was being voted on, but it was the only identified contingency in which a move into the next exploration period might occur in May 2015. That would not have been as a result of the invoking or granting of rights under clause 2(3), but rather would have been the result of a variation of the PSC consequent on a renegotiation with the Government. It was by no means certain that such a variation of the PSC would have been agreed to by the Government. Mr Stacey’s view was that the Government would have preferred to have the IEP work completed in the IEP so as to inform the decision making for the seismic work and drilling in the 1AEP. Mr Willett’s view was that the Government might well have looked favourably on such a rollover proposal but might have wanted a payment of money in return. In fact Adamantine made no such proposal to the Government, so far as the evidence shows, and the Government chose to grant an extension of the IEP. But assuming such a rollover to have been achievable, what matters for present purposes is that it would not have involved the grant of rights under clause 2(3) of the PSC. Moving into the next exploration period via such a negotiated variation of the PSC is not governed by clause 8, which is a vote on invoking rights under the existing PSC contractual framework. If the parties can only go forward with the PSC by renegotiating its terms, they need to agree between themselves whether and how to do so; and that requires agreement outside the existing framework of clause 8. Clause 8 is confined to a definition of the parties’ rights and obligations to move into the next Exploration Period pursuant to clause 2(3); if the parties can only proceed to explore and exploit the block pursuant to a renegotiated PSC, the terms on which they do so inter se will also need to be renegotiated.

It follows that what happened on 25 February 2015 was not a vote contemplated under clause 8.

This conclusion may be tested by inquiring what a clause 8 vote is if not a vote to invoke clause 2(3) rights. Mr Hickey identified three different alternatives at different stages of his argument. The first was a pair of mutually inconsistent arguments that it was a vote on whether to invoke clause 2(3) rights. In opening he submitted that it was a vote on whether to invoke clause 2(3) rights, but that they would not require to be invoked until one month before the end of an extended period if the Government agreed to extend the IEP. This argument was superseded by the different construction Mr Hickey advanced in his final speech, involving an irrevocable decision prior to any extension, which I have rejected for the reasons given. But in any event it suffered from a number of further objections. What would be being invoked in those circumstances would not be rights under the PSC as it then existed, but rights under the PSC as renegotiated. Clause 2(6) provides that the PSC automatically expires at the end of the IEP, 1AEP or 2AEP “as extended in accordance with this Contract”. The PSC does not in terms provide for extensions in respect of the IEP (whereas it does so provide in clause 2(5) in respect of drilling wells in the 1AEP and 2AEP). An extension of the IEP is therefore a variation of the PSC. A clause 8 vote can only be a vote to invoke rights under the existing PSC contractual framework, not such rights as might contingently arise under a varied PSC. Moreover the time for a drill or drop vote under clause 8 does not arise until three months before the expiry of the IEP. If the only clause 2(3) rights which the parties were voting to invoke were the contingent rights which would arise on the expiry of an extended IEP by a notice a month earlier, the vote would not fall to be exercised until three months before the expiry of the extended period. Further, the wording of clause 8 would not allow for the postponement of the decision if the extension were granted in the last month of the existing period (as happened in this case); in such circumstances clause 8.2 would require the giving of the clause 2(3) notice two months later, even if there were thereafter an extension in the final month. It might therefore require irrevocable commitment prior to and without the benefit of an extension of the IEP.

Mr Hickey argued in the alternative that the vote was on whether to give notice under clause 2(3), and that the notice might result in moving to the 1AEP if the Government waived its right to performance of the minimum work obligation. Clause 39 of the PSC provided that any waiver of an obligation of Adamantine should be in writing and signed by the Minister, and therefore, it was argued, contemplated such a waiver. There are a number of difficulties with this argument. The first is that there was no prospect of the Government simply waiving the requirement to acquire 500 kms of 2D seismic data which was part of the minimum work programme for the IEP, and allowing the project to go into the 1AEP without it being completed, as the discussion at the 25 February meeting made clear. Neither party contemplated that as a possibility. It was for this reason that Mr Moore suggested the possibility of rolling the unperformed IEP work into the 1AEP as work to be completed in that period in addition to the 1AEP work. That would not have involved the Government merely waiving obligations pursuant to clause 39. It would have involved a consensual variation of the PSC. I reject Mr Hickey’s submission that that would merely amount to a waiver of the timing obligation in relation to the performance of the IEP work obligation. In substance it would be a variation. The vote would therefore have been on whether to renegotiate rights under the PSC, not whether to give a notice to invoke rights under clause 2(3) in its existing contractual framework. Secondly, in such circumstances the giving of a notice under clause 2(3) would essentially be meaningless. It would not be an invitation to the Government to comply with its obligation under clause 2(3) to grant the 1AEP (which would not exist), but a precursor to a request to renegotiate the PSC in circumstances where such a request could as well be made without any clause 2(3) notice. To construe clause 8 in this way would be to require a vote on whether to do something meaningless and superfluous. Thirdly, this was not the proposal on which Bowleven was asked to vote.

The further alternative way in which Mr Hickey characterised the decision required under clause 8 is that it was whether to keep the project alive by negotiating with the Ministry to allow the participants to go into the next exploration period on the best terms commercially available from the Government. In other words it was not restricted to invoking rights under clause 2(3) in their current or even potential form. There are a number of difficulties with such a construction. First, it is inconsistent with the definition of “Exploration Period” in clause 8.1 and the wording of clause 8.2, which in my view make clear that the decision is one as to invoking clause 2(3) rights, not some decision on whether to go forward in the abstract. Secondly, the consequence of the argument, as Mr Hickey accepted in final submissions, is that a yes vote would commit the parties to go ahead with a varied PSC on whatever terms might be demanded by the Government, come what may. Such a construction would have odd and uncommercial consequences. It would require the parties to commit themselves to unknown and potentially onerous terms for their continued involvement in the project. It would also leave the way in which the parties were to share the benefits and burdens of such variation potentially undecided under the SPA. The SPA only defines their rights inter se in respect of the licence on the existing PSC terms. What, one may ask, would be the position as between Adamantine and Bowleven if the Government demanded an additional fee in return for an extension of time, or in return for an agreement to roll the unperformed IEP work into the next exploration period, for example? Or if it demanded an extra 100km of seismic work in addition to that currently required in the IEP and 1AEP? Or required other additional financial or performance obligations from the parties as the price for their not losing the interest in the block, which automatically lapsed at the end of the IEP if the minimum work had not been performed? The SPA is silent on who should pay for such variations of the PSC, precisely because the SPA is confined to allocating risks and benefits between Adamantine and Bowleven in relation to the current licence granted, which is a licence characterised and circumscribed by the existing terms of the PSC. If the terms of the PSC are to be varied, that requires a consensual variation of the SPA, which is not catered for by clause 8 in its existing form.

For these reasons, I conclude that what happened on 25 February 2015 was not a vote contemplated under clause 8, and does not have the consequence that Bowleven is obliged to transfer its 50% interest under clause 8.4.

That is sufficient to dispose of the claim. I will address Bowleven’s further arguments briefly.

Bowleven’s case is that by agreeing in January 2015 to seek an extension of the IEP from the Government, both parties envisaged that each would be entitled to take advantage of such extension if granted; that it was necessarily implicit in the agreement to seek an extension that the decision whether to move into the 1AEP would be deferred until the end of the extended period, to allow for an opportunity for the decision to be taken after the IEP seismic data had been obtained; and that the agreement to seek an extension was therefore inconsistent with Bowleven being required to make a decision on a drill or drop vote more than three months before expiry of the extended period if granted. Accordingly there was necessarily implicit in the agreement to seek an extension an assumption, shared by both parties, that a drill or drop vote would not be required in February 2015.

This argument provides no additional assistance to Bowleven. As I have explained, an agreement to seek an extension does not necessarily carry with it the corollary that a drill or drop vote will not be required; it would not do so if at the time there remained a realistic possibility of being able to invoke clause 2(3) rights in the absence of an extension. It was the impossibility of that occurring, known to the parties on 25 February 2015, which precluded the ability to have a valid clause 8 vote on that date. If I be wrong in that construction, and there was a requirement for a drill or drop vote on 25 February 2015, nothing that the parties said or did in relation to seeking an extension of time involved a shared assumption that there would not be a drill or drop vote. On the contrary, prior to the 21 January 2015, Adamantine had made clear that they contemplated a drill or drop vote being required. There was no mention of a drill or drop vote at the meeting on 21 January 2015 when it was agreed to seek an extension from the Government. Between 21 January 2015 and 25 February 2015 Adamantine made clear that it was expecting a drill or drop vote to take place in February, and called the management committee meeting for that purpose, circulating in advance the agenda which identified the vote as an agenda item. Indeed it is not clear that at any stage prior to Mr Cassidy’s email of 18 February 2015 Bowleven itself was of the view that there did not need to be a drill or drop vote, and even then the objection to a vote was expressed to be because there was inadequate data, not because it had in effect been agreed to postpone the vote as necessarily implicit in the agreement to seek the extension. It was not a view, if held by Bowleven, which was shared by Adamantine.

Accordingly, if I were wrong in my construction of clause 8, I would reject Bowleven’s case on estoppel by convention on the grounds that there was no shared assumption, still less one that was communicated between the parties.

If I am wrong in my construction of clause 8, and an irrevocable decision was required on 25 February 2015 as to whether to move into 1AEP, then there is much force in Adamantine’s argument that any conditional vote, or any vote other than an unequivocal yes vote, is to be treated as a no vote so as to trigger clause 8.4. Bowleven’s vote in this case was contingent on the grant of an extension of time being granted. If there was no extension, the vote was no; if there were an extension, the vote was to postpone a decision on the exercise of clause 2(3) rights until three months prior to expiry of the extended period. If I were wrong in my construction of clause 8, and if Bowleven was obliged to vote in circumstances where a yes vote would commit the parties to move into the 1AEP at the end of the extended IEP come what may, I would have concluded that its vote to postpone that decision was impermissible and would be treated as a no vote for the purposes of triggering clause 8.4. It would make no commercial sense to treat a failure to vote under clause 8 as a breach merely sounding in damages or giving rise to a right to put an end to the contract. A clause 8 vote is intended to provide the parties with certainty in relation to the next exploration period.

This issue does not arise. Had it done, I would have rejected the submission that Adamantine failed to conduct good faith discussions. The Adamantine representatives genuinely believed that it was necessary to have a drill or drop vote on 25 February 2015: this had been their stated position throughout. The discussion made clear that Adamantine wished to move into the next exploration period and sought Bowleven’s voting intentions. Bowleven had had ample notice from the agenda that Adamantine would be seeking a vote. At the meeting there was first a discussion of the status of the extension request and current views of its prospects of success, on which Bowleven had already been updated with reports of meetings with the Ministry. Each side had previously discussed and was able to form its own view of the existing technical data acquired for the block and on the commercial prospects for further exploration so far as current information permitted. There had been considerable discussion, and some difference of view, as to where to perform the seismic data acquisition and where the best prospects lay within the block. “Good faith discussions” for the purposes of clause 8 do not require the parties to rehearse their respective reasons for and against moving into the next exploration period, at least if, as in this case, the technical analysis of the data and the prospects for the block had been the subject of considerable previous discussion.

The bad faith allegation seems to spring principally from the rollover suggestion made by Mr Moore at the meeting. That was not, as Bowleven would have it, a settled plan of Adamantine’s by which Bowleven was ambushed at the meeting so that Adamantine could steal a commercial advantage from Bowleven by demanding an assignment of its 50% interest in the event of a no vote. The rollover proposal was not what Bowleven was being asked to vote on. It was raised by Mr Moore in the course of the meeting in reaction to the correction of his previous point which had been understood as meaning that the Government would allow the parties to satisfy the IEP requirements by making the minimum expenditure without requiring them to carry out the work obligation. It had never previously been raised by Adamantine with Bowleven (although rolling the 1AEP work into the IEP, a quite different commercial proposition, had) and was not something which Adamantine subsequently proposed to the Government at any time prior to the grant of the extension on 6 May 2015. It was not a corporate strategy of Adamantine at all, still less one kept up its sleeve and bounced on Bowleven at the meeting in bad faith.

Bowleven submitted that in order to fulfil its good faith obligations, Adamantine was obliged to discuss at least (1) its concerns about whether a time extension would be forthcoming and (2) the merits of the rollover proposal.

As to (1), there was adequate and good faith discussion of the status of the extension request. Both parties knew that the assessment was that its success was possible but not certain. There was no need for further discussion of nuances as to where the degree of probability lay within such boundaries, which was not relevant to the drill or drop decision on the assumption that contrary to my earlier conclusion such a decision was required.

As to (2), the possibility of a rollover was not what was being voted on and could not form the subject matter of a valid drill or drop vote because it would be a negotiated variation of the PSC, which would require agreement between Adamantine and Bowleven outside the framework of clause 8. In any event there was no bad faith: it was nothing more than a possibility which emerged in the course of the meeting and Bowleven had the opportunity to consider it.

Adamantine’s claim for an order for transfer of Bowleven’s participating interest fails and will be dismissed.