Marathon Oil UK LLC v Centrica Resources Ltd & Ors

Under a joint operating agreement, participants are liable for their proportionate share of the properly incurred employment costs of staff engaged in authorised operations, including the true cost of defined benefit pension arrangements. Authorisation arises when the relevant operations are approved; later annual budgets estimate and fund liabilities already authorised and do not create a separate requirement for specific approval of each pension cost. That conclusion is subject to proper controls over the need for the employees, their selection and the propriety of their remuneration arrangements. A court may declare the contractual methodology for calculating liability even if the final figure remains to be determined. A contractual discretion must be exercised honestly and in good faith, but no broader fiduciary obligation need be determined where no lack of good faith is proved.

The claimant operated North Sea Brae field ventures under a 1980 Joint Operating Agreement and a 1990 Unitisation and Unit Operating Agreement. The defendants were participants in those ventures. The dispute concerned whether they had to contribute to a proportion of deficit recovery charges arising from a defined benefit pension scheme covering employees engaged in the operations.

The defendants argued that liability required specific Operating Committee approval, that the operator had breached contractual and fiduciary good faith duties, and that earlier payments were recoverable for mistake. The claimant sought determination of liability only, leaving quantum for later proceedings or agreement.

1. Liability under the agreements. The claim succeeded on liability. The agreements formed a single contractual scheme under which the operator had charge of the operations, selected and remunerated employees, paid operational costs, and charged the participants their proportionate share of properly incurred costs. The Accounting Procedure reinforced that construction by including employee benefits and by recognising that estimates could be required.
2. The Operating Committee’s authorisation of the relevant operations authorised the employment and remuneration costs necessarily associated with them, including pension arrangements. Annual budgets approved when payments became due approved the amounts payable in respect of an already authorised liability. The participants were therefore in breach when they refused to approve budgets on the ground that they had no liability for the pension costs.
3. The construction did not give the operator an unlimited or uncontrolled entitlement. The result could differ if there were a material dispute about whether employees were required, whether they were properly selected, or whether the pension arrangements were proper. Those qualifications were not engaged on the evidence.
4. The absence of a specific pension-deficit indemnity, or of provisions equivalent to those dealing with insurance or decommissioning, did not alter the contractual allocation of risk. It was commercially inconceivable that participants could take the benefit of authorised operations while leaving the resulting true remuneration cost to the operator. Accounting requirements could not make an agreed contractual obligation uncommercial.
5. The preliminary objection failed. The revision of the percentage allocation did not make the claim premature. The Commercial Court could declare the methodology required by the contract where it could not yet determine the final figure. Any adjustment for past overpayment could be addressed when quantum was determined.
6. The operator accepted that contractual discretion had to be exercised honestly and in good faith. It was unnecessary to decide whether a broader fiduciary duty existed because no lack of good faith was established. The participants’ mistake-based counterclaim also failed for want of the necessary legal foundation.

The court accordingly declared the participants liable to meet a share of a proportion of the pension scheme deficit recovery charges attributable to employees engaged in the operations.