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“Put it on the JV tab” appeal dismissed
On 6 June 2017 the Court of Appeal of the Supreme Court of Western Australia handed down its decision in the case of Santos (BOL) Pty Ltd v Apache Northwest Pty Ltd (now known as Quadrant Northwest Pty Ltd in favour of Apache Northwest (now Quadrant). This was an appeal lodged by Santos in relation to a 2016 decision of the Supreme Court of Western Australia which we reviewed here.
This dispute was in relation to Apache (operator) and Santos as parties to a JOA for development of the John Brookes field. This case and appeal concerned the installation of gas compression facilities on Varanus Island. These facilities were proposed and committed to by the Apache group and at a later date, charged back to the joint venture under a production programme and budget and approved by Apache under a deemed approval provision in the JOA (which did not require Santos’ approval).
The court of appeal found in favour of Apache that the installation of gas compression facilities could be dealt with under a production programme and budget (and were therefore approved by the joint venture pursuant to the deeming provision) and consequently, the appeal was dismissed.
What's 'in' a production programme
The key issue on appeal was whether the compression facilities could be capable of being included in a production programme and budget under the JOA. Santos argued that the trial judge erred in law by construing the JOA incorrectly and that the compression facilities project could not be included in a production programme and budget because it was considered development work. Therefore, it could only be included in a development programme and budget.
Apache’s view was that the JOA should be read in a “temporal” sense, such that the development phase of the project had finished and operations and activities after first production of petroleum should be considered as being in a production phase, and be dealt with as production programmes and budgets.
The Court of Appeal adopted Apache’s view in its interpretation of the JOA in that:
- the language of the JOA is more consistent with the different kinds of programmes and budgets being concerned with the phases of a discovery, rather than the nature of the activities themselves;
- the industry understanding of the relevant terms was more consistent with Apache’s view, being that a reasonable businessperson would not understand the JOA to divide the kinds of work that could be the subject of a programme and budget in a manner productive of commercial uncertainty, particularly so in the commercial context of the petroleum industry where the distinction between exploration, appraisal, development and production phases of a petroleum project is widely understood;
- there are various ways in the JOA under which additional unanticipated infrastructure costs may be imposed on a minority party to the JOA, and if the commercial purpose of a deemed approval of a programme and budget is to prevent an inability of the parties to agree from jeopardising past investment and future performance, it would be expected that the provision would apply to all kinds of expenditure; and
- the language and commercial purpose of the JOA treated the kinds of activities (exploration, appraisal, development and production) as not mutually exclusive activities.
Managing risk of uncontrolled expenditure
The outcome of this case and appeal reiterates that under these particular contractual arrangements there were potentially unlimited cost implications for a minority party once the joint venture had made a decision to go into development.
Although this case and subsequent appeal turned on the particular clauses in the JOA itself, we emphasise that joint venture parties (particularly minority parties) in light of this decision:
- put appropriate protocols in place to ensure that all initial development plans are scrutinised and to request clarification on all items listed, but not necessary costed, at that time; and
- prospectively review their contractual arrangements and be fully aware of the decision points in the life of a joint venture that may result in expenditure being committed to without its approval.
If your joint venture arrangements need review or you would like an innovative IT solution to manage decision points or obligations in your joint venture, please let us know.