Venture North Sea Gas Ltd v Nuon Exploration & Production UK Ltd

Whether an agreement is in substantially the form of an earlier draft is a question of substance, assessed objectively by comparing the agreements as a whole and in their factual matrix. Individual differences may be considered cumulatively. Material changes to contractual rights and obligations prevent substantial conformity. Commercial effects and practical realities may be considered where commercial parties would overwhelmingly be expected to respond in a particular way, but speculative workarounds cannot cure fundamental contractual changes. Failure to satisfy a condition precedent by the contractual deadline may terminate an entire transaction where the agreement contains no severance clause.

Under a sale and purchase agreement, Venture North Sea Gas Limited agreed to sell interests in petroleum production licences to Nuon Exploration & Production UK Limited. Completion depended on third-party joint operating agreements being executed in substantially the form of a draft agreement annexed to the sale agreement.

Venture sought specific performance after executing agreements with the other licence participants. Nuon refused to complete, arguing that the conditions precedent had not been fulfilled by the back stop date. The principal issues were whether Nuon’s agreement was required and whether the executed agreements were substantially in the draft form.

1. Claim dismissed. The executed joint operating agreements were not in substantially the form of the draft agreements. The relevant condition precedent was therefore unsatisfied by the back stop date. As the sale agreement contained no severance clause, the claim as a whole failed.
2. The comparison required an objective assessment of substance rather than form. The agreements had to be considered as a whole and in their factual matrix. Individual differences could be assessed cumulatively, although several trivial differences would not necessarily produce a material overall change. The approach was informed by Yewbelle Limited v London Green Developments Limited [2006] EWHC 3166 (Ch).
3. The amendment reversing the default authority of the operator to represent the participants materially altered the parties’ contractual rights and shifted the balance of power towards restricted authority, delay and possible deadlock. It went to the heart of the joint operating agreement.
4. The new unanimity requirements for certain expenditure and AFE decisions also materially altered the financial relationship between the participants. They created a moratorium capable of delaying production operations. Proposed workarounds outside the agreement were speculative and could not demonstrate substantial conformity.
5. The remaining differences, considered individually and cumulatively, did not alter that conclusion. The production-stage unanimity requirements and the operator-authority amendment were sufficient, and together made the result clear.
6. The court also concluded, academically, that Nuon’s agreement was not required for the executed agreements to constitute completion documents. The reference to “parties” could be read consistently with the main agreement as referring to the third-party participants. Alternatively, any agreement required from Nuon could not be unreasonably withheld where the executed agreement conformed substantially to the draft.