Spirit Energy Resources Ltd & Ors v Marathon Oil UK LLC

Where a joint operating agreement gives an operator charge of operations subject to prior approval of programmes and budgets, approval of the operations authorises related employment and pension expenditure. Participants must bear their agreed shares of all costs incurred in conducting those operations, even where the eventual extent of a liability was unknown or unforeseeable at approval. Clauses requiring costs to be borne and settled, read with an accounting procedure intended to allocate benefits and burdens equitably and keep the operator neutral, do not create a discretion to refuse payment. A construction leaving an important allocation question to future agreement is commercially unsound absent clear words. Prior approval and the operator’s duty to act genuinely, honestly and in good faith provide safeguards against improper expenditure.

Three participants in oil and gas joint ventures appealed from Knowles J’s decision in favour of the operator, reported at [2018] EWHC 322 (Comm). Under two joint operating agreements, an operating committee approved annual programmes and budgets, and the operator employed staff whose remuneration included defined-benefit pensions. A substantial pension deficit later resulted in deficit recovery charges exceeding £68 million. The participants disputed liability, arguing that the charges required later approval and had not been foreseeable when the operations were authorised. Permission to appeal was limited to that issue. The central question was whether prior approval of the operations and budgets authorised the related pension liabilities and required the participants to bear their allocated shares.

The appeal was dismissed. Lord Justice Green gave the leading judgment, with Lord Justices Henderson and Hamblen agreeing.

1. Construction. Applying the principles in Arnold v Britton [2015] UKSC 36, the court construed the JOA by reference to its natural and ordinary language, its provisions read as a whole, its overall purpose and, where relevant, commercial common sense. Particular weight was given to the express purposes in Exhibit A: equitable allocation of charges and credits and keeping the operator neutral between gain and loss.
2. Authorisation. The approved programmes and budgets authorised the operations, including the hiring of employees and the provision of pension benefits. The operator was therefore authorised to incur liabilities consequential on those operations. The fact that the eventual size of the pension deficit was unknown or unforeseeable when approval was given did not alter the result. Article 7.2 required the operator’s requirements arising from previously approved programmes and budgets to be included in later budgets; it did not confer a discretion to honour some requirements and refuse others.
3. Allocation. Articles 10.1 and 10.2 used mandatory and comprehensive language. They required all costs and expenses incurred in authorised operations to be borne by the participants and settled under Exhibit A. The accounting procedure contained no exception for costs whose full nature or amount was unknown when the relevant operations were approved. The contractual purposes also prevented participants from taking the benefits of approved operations while shifting the associated burdens to the operator.
4. Commercial sense and safeguards. It was not commercially sensible to leave responsibility for a major category of operating costs to future negotiation absent clear language. Prior approval supplied financial control, while estimates and contingencies reflected the inherent uncertainty of the operations. Where the JOA conferred a contractual discretion, the operator was subject to an implied duty to act genuinely, honestly and in good faith, consistently with Socimer International Ltd v Standard Bank London Ltd [2008] EWCA Civ 116. The court expressed no conclusion on pension surpluses, the indemnity clause or the alternative factual authorisation argument.

The participants were consequently liable for their allocated shares of the deficit recovery charges.

1. Court of Appeal (Civil Division): The appeal was dismissed. Green LJ gave the leading judgment, with Henderson and Hamblen LJJ agreeing. The decision is reported at [2019] EWCA Civ 11.
2. Business and Property Courts of England and Wales: Knowles J construed the joint operating agreements as making the participants liable for the disputed pension costs and rejected their claim for declaratory relief. The decision is reported at [2018] EWHC 322 (Comm).