Pan Petroleum AJE Ltd v Yinka Folawiyo Petroleum Co Ltd & Ors

The parties are concerned with an Oil Mining Lease (No 113) offshore from the Federal Republic of Nigeria. Their relations are governed in particular by a Joint Operating Agreement dated 21 September 2007. Operations in the field are said currently to be loss making, with corresponding pressures for the parties.

Wells Aje-4 and Aje-5 are operational. The parties are in dispute over whether development of wells Aje-6 and Aje-7 has been properly approved. Development of those wells will involve more cash calls on the parties.

On the afternoon of Friday 20 January 2017 at a hearing at which all parties were represented by Leading Counsel and Solicitors, an interim injunction was continued against the Defendants, on the application of the Claimant and in support of arbitration proceedings which were then close by. I was the judge making the order that continued the injunction. My concern, expressly, was to hold the ring for a short period. I required substantial security for the cross undertaking in damages from the Claimant.

The injunction was in these terms (so far as material), using wording proposed by the Claimant:

“2.

Up to and including [a specified date] the Defendants must not exercise or purport to exercise (by written notice or otherwise) in respect of the Aje-6 or Aje-7 development wells:

2.1

any of the rights and/or remedies in Article 8.4 of the Joint Operating Agreement to vest, deem to vest, transfer, or deem to transfer for its own benefit or otherwise the Claimant’s Entitlement and/or Participating Interest in the Joint Operating Agreement or Oil Mining Lease 113;

2.2

any of the rights and/or remedies in Article 8.2 of the Joint Operating Agreement to exclude the Claimant from participating in, or voting at, meetings of the Operating Committee;

2.3

any right of termination at law or other remedy which would deprive the Claimant of its Entitlement and/or Participating Interests in the Joint Operating Agreement or Oil Mining Lease 113.”

Under Article 8.1 of the Joint Operating Agreement a default notice will issue to a defaulting party if there is default in the payment of cash calls. Article 8.2 is in these terms (so far as immediately material):

“Operating Committee Meetings and Data

Beginning five (5) Business Days from the date of the Default Notice, and thereafter while the Defaulting Party remains in default, the Defaulting Party shall not be entitled to attend Operating Committee or subcommittee meetings or to vote on any matter coming before the Operating Committee or any sub committee until all of its defaults have been remedied (including payment of accrued interest). Unless agreed otherwise by the non-defaulting Parties, the Voting Interest of each non-defaulting Party during this period shall be its proportionate share, expressed as a percentage, of the total applicable Cost Bearing Participations of the non-defaulting Parties. Any matters requiring a unanimous vote of the Parties shall not require the vote of the Defaulting Party. …”

Article 8.4 of the Joint Operating Agreement is in these terms (so far as immediately material):

“Remedies

8.4.1

During the continuance of a default, the Defaulting Party shall not have a right to its Entitlement [defined as “that quantity of Hydrocarbons which a Party has the right and obligation to take delivery pursuant to the Lease, Article 9 of this Agreement, and any applicable offtake agreement”] which shall vest in and be the property of the non-defaulting Parties. The Technical Adviser (or the notifying Party if the Technical Adviser is a Defaulting Party) shall be authorized to sell such Entitlement in an arm’s-length sale on terms that are commercially reasonable under the circumstances and, after deducting all costs, charges and expenses incurred in connection with such sale, pay the net proceeds to the non-defaulting Parties in proportion to the amounts they are owed by the Defaulting Party hereunder (and apply such net proceeds toward the establishment of the fund under Article 8.4.3, if applicable) until all such amounts are recovered and the fund is established. Any surplus remaining shall be paid to the Defaulting Party, and any deficiency shall remain a debt due from the Defaulting Party to the non-defaulting Parties. When making sales under this Article 8.4.1, the non-defaulting Parties shall have no obligation to share any existing market or obtain a price equal to the price at which their own production is sold.

…

8.4.4

Notwithstanding that the amount of the default has been satisfied pursuant to Article 8.4.1, if the Defaulting Party fails to pay when due its applicable Cost Bearing Participation share of Joint Account expenses, including cash advances and interest by the forty-fifth (45^th) Day following the date of the Default Notice, then, without prejudice to any other rights available to the non-defaulting Parties to recover amounts owing to them under this Agreement, two or more of the non-defaulting Parties having a majority of the interests of the non-defaulting Parties (after excluding Affiliates of the Defaulting Party) shall have the option, exercisable at anytime thereafter until the Defaulting Party has completely cured its default, to require that the Defaulting Party completely withdraws from this Agreement and the Lease. Such option shall be exercised by notice to the Defaulting Party and each non-defaulting Party. If such option is exercised, the Defaulting Party shall be deemed to have transferred, pursuant to Article 13, effective on the date of the non-defaulting Party’s notice, all of its rights, obligation, title and beneficial interest in and under this Agreement, the Lease, and the Technical Assistance Agreement to the non-defaulting Parties. …”

Early on Monday 23 January 2017 a meeting of the Operating Committee was held, at the instigation of the Defendants. The Claimant was given less than 3 minutes notice by email and was not invited to participate.

The First, Second and Fourth Defendants (“the Relevant Defendants”) were represented at the meeting; the Claimant was not. The meeting voted in favour of a number of resolutions. These included resolutions in these terms:

“…

3.

That the approval of the Operating Committee be given to Cash Call immediately for $2.8mm for long lead items for D&C of Aje 6 …;

4.That the approval of the Operating Committee be given to Cash Call immediately for $1.6mm for long lead items for hook up of Aje 6;

5.That in respect of the Cash Call to be issued subsequent to this resolution relating to the items outlined in paragraphs 3 and 4 above, and to the extent that sums have already been paid in respect of Cash Call 29 or the purported Cash Call 29, relating to these items, then those sums be applied in connection with the further Cash Call and the further sums requested from each party in the further Cash Call be adjusted accordingly;

…

11.

That the approval of the Operating Committee be given to establish a Development Budget for 2016 and 2017, in the amount of $40.4MM for D&C of Aje6;

12.

That the approval of the Operating Committee be given to establish a Development Budget for 2016 and 2017, to include $14.2MM for hookup of Aje6;

…

14.

That the approval of the Operating Committee be given, to Cash Call immediately $13.1MM for long lead items for D&C of Aje-7;

15.

That the approval of the Operating Committee be given, to Cash Call immediately $2.0MM for long lead items for hook up of Aje-7;

16.

That the approval of the Operating Committee be given to establish a Development Budget for 2017, in the amount of $47.5MM for D&C of Aje7;

17.

That the approval of the Operating Committee be given to establish a Development Budget for 2017, to include $16.5MM for hookup of Aje7;

…”

At the Meeting the Relevant Defendants treated the Claimant as excluded from attending or voting pursuant to Article 8.2 of the Joint Operating Agreement. The Relevant Defendants treated themselves as the entirety of what were expressly described as “the non-defaulting Members of the” Operating Committee. Each voted in favour of the resolutions.

The Claimant says that what happened on 23 January 2017 amounts to a breach of the injunction, and it brings an application for the Court to hold the Relevant Defendants in contempt of court.

It is in my view plain beyond argument that what I have just described amounted to the exercise or purported exercise of “rights and/or remedies in Article 8.2 of the Joint Operating Agreement to exclude the Claimant from participating in, or voting at, meetings of the Operating Committee”.

Was that exercise or purported exercise “in respect of the Aje-6 or Aje-7 development wells”? The resolutions concern approval of financial calls and budgets for work on or with those wells, rather than approval of the work itself. But on the plain and natural meaning of the words “in respect of”, excluding the Claimant from participating in a meeting approving a financial call or a budget for work on or with a well is exercising or purporting to exercise that right “in respect of the” well. The words “in respect of” are wide words, as Mr David Joseph QC (appearing for the Claimant) submits.

Mr Rhodri Davies QC (appearing for the Defendants) argues that, when used in connection with Article 8.4 (and specifically Article 8.4.4) in paragraph 2.1 of the injunction, the words “in respect of the Aje-6 or Aje-7 development wells” must refer to failure to pay in respect of those wells (rather than other wells). They should mean the same, the argument continues, when applied in connection with Article 8.2 in paragraph 2.2 of the injunction. This is material because in exercising Article 8.2 rights the Relevant Defendants were relying on a failure to pay in respects other than in respect of those wells.

As to this argument, I do not consider that it follows, either necessarily or otherwise as a matter of interpretation, from the fact that the words “in respect of the Aje-6 or Aje-7 development wells” may have narrower application in the context of Article 8.4 that they have a narrower application in the context of Article 8.2. The Article in question will inform their meaning, and breadth of application, when used in relation to that Article.

Mr Davies QC argues that the injunction does not say that the Defendants were restrained from acting “even if the Claimant was in default in respect of undisputed cash calls which did not concern the Aje-6 or Aje-7 wells”. He is, with respect, correct only in the technical or narrow sense that those are not the words that are used. The words that are used (“in respect of the Aje-6 or Aje-7 development wells”) are wide enough to restrain acting that was in respect of the Aje-6 or Aje-7 development wells even though that acting was undertaken in reliance on undisputed cash calls which did not concern the Aje-6 or Aje-7 wells.

Mr Davies QC argues that it is material to the interpretation of the injunction that the Claimant had not and could not put forward a case for protection from the consequences under Article 8.2 where its default was in respect of undisputed cash calls which did not concern the Aje-6 or Aje-7 wells. It is, rightly, acknowledged in this argument that it is the terms of the injunction that matter. If it is wider than the Claimant is entitled to then that would be for an application to vary or discharge the injunction, or for an appeal against its grant or against a refusal to vary or discharge.

But in any event Mr Davies QC’s argument meets the obstacle that the parties were in dispute in relation to the Aje-6 well and that dispute might cause the transaction (unless restrained) of different business by the Operating Committee concerning the Aje-6 well than would be the case if the Claimant was right in that dispute.

Mr Davies QC is correct in saying that the dominant concern in ordering the injunction was to prevent the use of Article 8.4 of the Joint Operating Agreement to cause irreversible loss to the Claimant of its entire commercial interest. However Article 8.2 had its place in the injunction too.

Mr Davies QC argues that the standard of certainty required before reaching a conclusion on meaning is very high in the context of contempt proceedings. Thus, he argues, if there is a reasonable argument for a construction that would not put the Relevant Defendants in breach of the injunction, then the application should fail. I do not disagree but the present case is plain.

The Relevant Defendants took legal advice before doing what they did on 23 January, but legal privilege in the advice has not been waived and so I do not know the exact content of that advice. I record that the Claimant, through Mr Joseph QC, centred its argument on the contention that the Relevant Defendants intended to do what they did (which was in breach of the injunction) and not that they intended to breach the injunction.

For the reasons given, I find the Relevant Defendants to be in contempt of court. I will consider submissions from Counsel as to the consequences.