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Оглавление3. Parties, participating and carried interests and collateral support
Essential to the proper working of the JOA is the identification of the persons that will be party to the JOA. The management of the admission of new parties to, and the withdrawal (or even the expulsion) of parties from, the JOA is addressed separately elsewhere (see Chapter 14).
The JOA should also set out an express quantification of each party’s interests under the JOA, which is done typically through the participating interests mechanism. This in turn leads to the need to consider how joint property is held between the parties.
The JOA should also reference the role of any persons that might support the obligations of the JOA’s parties through the provision of collateral support.
(a)Defining the parties
The JOA will identify each party to the JOA as it exists as at the execution date (see 5.2), through the opening recitals in the JOA. Further detail regarding each party will also be supplied through the notices provisions in the JOA (see 20.8).
These provisions will record the initial parties to the JOA, but where during the lifetime of the JOA there are any changes in the identity of the parties, the JOA will not explicitly track such changes. Consequently, the history of changes in the identities of the parties to the JOA will be discoverable only from an analysis of the JOA and the documents that record any later transfers of interests or any changes of name in respect of a party. Where a JOA has been in existence for some time, the forensics of establishing the chain of title through the parties over the years can be a formidable task.
A more certain (but not a common) approach is to require the operator to append to the JOA a schedule of the current parties from time to time, and to revise and circulate that schedule to all parties in the event of any changes in the identity of any of the parties. This change might also be recited through a combined novation and amendment agreement (see 14.1), which will be supplementary to the JOA.
The definition of a party should be expressed to include that party’s successors in title and permitted assignees,1 and the JOA should be expressed to pass to the benefit of any such successors or assignees.2 In the latter case, any requirement in the JOA for a novation agreement as a condition to the transfer of the interests of a party under the JOA to another person (see 14.1) should ensure that such a transition to an assignee is expressly effected. The reference to successors in title is intended to ensure that where a party undergoes any event of merger, amalgamation or other corporate transformation, the JOA will continue to bind that party or any party that is the product of such an event.
One of the parties to the JOA will typically be agreed by the other parties to act as the designated operator in the performance of the joint operations (see Chapter 7). Thus, this party will have two distinct capacities under the JOA: as the operator and as a party.3 The role as operator is quite distinct from the role as party, and undertaking the role of operator should afford no special privileges to the party in its capacity as a party. How this duality of interests operates in practice is demonstrated, for example, by the cashcall or invoice request mechanisms under the JOA (see 10.4), whereby the operator will cashcall or invoice request all of the parties, including itself, for the costs of conducting the joint operations.
The parties will be keen to preserve the financial and operational integrity of their joint venture, and consequently the ability of a party to transfer its interests under the JOA to a third party will usually be closely controlled within the JOA. This aspect is addressed in detail in Chapter 14. Any nervousness about the identity of a new party to the JOA will abate where a party withdraws from the JOA (see 14.7), or commits a default which results in its interests being forfeited (see 18.7), as in either case the interests of the departing party are intended to pass to the remaining (non-defaulting or non-withdrawing) parties (although in each case there could be a new nervousness about the economic impact of the enhanced interests of the remaining parties).
(b)Concession and JOA party symmetry
Because the JOA represents the horizontal relationship between the parties with regard to, and in respect of their interests in, the concession (see Chapter 2), the popular expectation is that there will be complete symmetry between the concession-holders and the parties to the JOA. This is usually the case, but this is not always necessarily so.
•Non-JOA parties – there may be persons who are party to the concession but who are not also party to the relevant JOA. Examples of this include: on the UKCS, where a licence awarded for the exploration for and production of petroleum governs more than one operating interest area (or block), the parties to each particular block will have their own JOA, and any other persons (recorded on the licence but not also participants in the particular block) will not be party to that JOA; where a party has withdrawn from the JOA or has been deemed to withdraw from the JOA through forfeiture but in either case a corresponding withdrawal from the concession has not been effected; where a state entity that is named as a concession-holder will not be party to an ancillary JOA which was entered into to manage a state participation right (see 4.1); or where a representative of the state has executed the concession solely in the capacity of the grantor of a stabilisation right to the concession-holder parties.
•Non-concession parties – it may be that some of the parties to the JOA are not also party to the relevant concession. This happens, for example, where the JOA includes the appointment of a contracted operator that signs on to the JOA (see 7.6); where any collateral support (see below) given by a person in respect of a party’s commitments under the JOA is recited within the terms of the JOA rather than separately; where a party has withdrawn from the concession but remains party to the JOA to attend to any remaining matters; or where the JOA continues after the termination of the concession in order to address residual matters between the parties (see 5.5).
(c)Affiliate interests
It may be that two or more of the parties to the JOA are affiliates (according to the definition of an affiliate under the terms of the JOA or by reference to the governing law of the JOA;4 see 20.4).
Depending upon the degree of parental company control that is exercised over those affiliated parties, if they are likely to vote as a bloc then they might be regarded as a single, consolidated party for the purposes of any voting control mechanism that requires the vote of more than one party.5 However, it might be that those affiliated parties could want to vote differently in respect of a particular proposal, which possibility would question the viability of such consolidation in the JOA.
The JOA could apply particular provisions to affiliates in respect of affiliate contracts (see 11.3), transfers of operatorship and transfers of interests to affiliates (see 14.2) and confidentiality disclosures to affiliates (see 15.1). The change of control provisions in the JOA (see 14.5) are intended to address the situation where a party ceases to have the affiliation which it had at the time when it first became party to the JOA.
3.2 Participating and carried interests
(a)Identifying the participating interests
Except where a concession is held by a single entity or an incorporated entity most concessions do not create an individual interest in respect of each concession-holder (although some concessions do so, and where this is the case there should be symmetry between the participating interests which are recited in the concession and in the JOA). Rather, the concession will be awarded to all the persons that together constitute the concession-holder, with joint and several liability between those persons (see 17.4). Therefore, it will be a responsibility of the JOA to create the individual interests of the parties.
As a result, what is sometimes called the ‘interests provision’ in the JOA will specify the participating interest of each party. Each party’s participating interest will represent the undivided, individual interest of a party (expressed as a percentage of the aggregate of the participating interests of all the parties) under the JOA in the totality of the rights and obligations that are derived from the concession.6
Table 3.1. Division of participating interest
1. Except where otherwise provided in this agreement, the participating interest of each party is as of the effective date as follows:
| Party | Participating interest |
| A Co | 40% |
| B Co | 40% |
| C Co | 20% |
| 100% |
2. In the event of any transfer by any party of all or part of its participating interest the participating interests of the parties shall be revised accordingly.
[‘Participating interest’ means each party’s share (expressed as a percentage) of the total shares of the parties in the concession, all joint property and the rights, obligations and liabilities derived from the concession, this agreement and the conduct of the joint operations.]
The participating interests that apply to the parties at the outset of a JOA will be the product of negotiation between those parties but the participating interest is not necessarily determinative of the true economic allocation of rights and liabilities between the parties under the JOA. The true position of a party could be affected by carried interests and exclusive operations (see Chapter 13), but this should not cause a revision of the participating interests as they are recited in the JOA.
A fair legal analogy which can be helpful in defining the true nature of the participating interest is to suggest that if the interests of the parties in the concession (which does not create participating interests between the parties at the concession-holder level) are held as joint tenants (being a collective, unitary interest where each joint tenant is entitled to possession of the whole of an interest that is the subject of co-ownership between a group of parties),7 then the parties sever that joint tenancy through their entry into the JOA, where the interests of the parties in the JOA will be held as tenants in common (being a separate, undivided interest where each tenant in common is entitled to a distinct share in the whole that is commensurate with its defined participating interest).8 Indeed, the CAPL JOA declares9 that the parties intend that their interests in the joint lands and in the joint property will be held as tenants in common.
The point made previously about identifying the parties over the lifetime of the JOA could be made equally in respect of tracking changes to the participating interests, and similarly therefore the participating interests of the parties from time to time might be recited in a schedule to the JOA, with a requirement for the operator to revise the schedule and to distribute the revised schedule to all the parties in the event of any changes to the participating interests.
Where the JOA is constituted by several parties, each with its own individual participating interest, then it may be that one of the parties undertakes a programme of buying out the interests of the other parties as the opportunities to do so arise. This activity will increase the aggregate participating interest of the acquiring party and will reduce the number of the parties in total. Taken to the extreme, this process of consolidation will result in there being one party to the concession, with a participating interest of 100%. The effect of this process of aggregation on the voting control regime in the JOA (see 8.4) should be appreciated.
In the context of North American leasehold interests the manner in which the participating interests of the parties is determined will necessarily be different according to the different constitutional basis for the relevant JOA.
Thus, taking the example of the AAPL JOA by way of illustration, under AAPL JOA Form 610 each party will bear the costs of the joint operations and will own the produced petroleum according to the ratio of its defined leasehold interests10 (but neither of the terms ‘participating interests’ or ‘percentage interests’ is actually used to describe such allocation).
Under AAPL JOA Form 710, each party is expressed to have a participating interest, which is defined as the percentage of the costs and the risks of undertaking an operation which a party agrees to bear.11
Under AAPL JOA Form 810, each party will have what is defined as a participating interest share, which is in turn defined as the proportion (expressed as a percentage) that the leasehold interests of that party that have been pooled in the JOA bears to the leasehold interests of all the parties that have been so pooled in the JOA (unless all of the parties agree to another basis for determining their participating interest shares),12 and all rights, obligations, property and petroleum will be owned by the parties according to their respective participating interest shares.13
Similar provisions apply in respect of the CAPL JOA, wherein a working interest is defined for each party as each party’s percentage undivided working interest in the defined joint lands.14
Despite these differences in the manner of determination of a party’s interest in the JOA, however, the result will be much the same as the manner of determination of a party’s participating interest as outlined above – the parties will agree to allocate the costs and the benefits that are associated with the joint operations between themselves, according to certain pre-defined percentage shares.
(b)The role of the participating interests
A party’s participating interest will define several items under the JOA,15 notably:
•that party’s required percentage contribution to the operator’s cashcalls or invoice requests (see 10.4) and to the costs associated generally with the JOA, which could, however, be qualified by a carried interest or in accordance with the terms of a farm-out agreement (see Appendix 1);
•the percentage interest that that party has in the joint property (see 3.2) and the party’s entitlement to produced petroleum (see 12.3); and
•that party’s share in the liabilities incurred under the JOA (see Chapter 17).
The parties’ participating interests will apply in respect of the joint operations. Where the JOA permits exclusive operations, those exclusive operations will recite their own, individual participating interests as between the participating parties (see Chapter 13).
(c)Carried interests
It may be that a party can secure an arrangement whereby all or part of that party’s share (as defined by its participating interest) of the costs associated with the performance of certain of the joint operations will be met on its behalf (or ‘carried’) by one or more of the other parties, notwithstanding that the carried party is otherwise a full party to the JOA.
Such a carried interest arrangement will typically apply during the exploration and appraisal phases, and is intended to protect the carried party from the risk of incurring exploration and appraisal expenditures without the promise of subsequent petroleum production and revenues which would compensate the carried party for its initial investment.
A carried interest could be held by a private person (such as in accordance with the terms of a farm-out agreement – see Appendix 1), but the principal circumstance to consider in the context of a carried interest is one whereby a state entity elects to exercise a participation right under the concession and the corresponding JOA from the outset (see 4.3).
Whether the carried party will be required to repay the contribution of the parties to that carried interest once petroleum production begins will be a matter for negotiation between the carrying parties and the carried party. Where the carried party does repay the carry, consideration should also be given to whether that repayment should additionally include any element of uplift, so as to compensate the carrying parties for the value of the funding which they have provided.
The phrases ‘hard carry’ and ‘soft carry’ are often used to describe whether a carried interest is intended to be repayable, but this is a dangerous shorthand to rely on, as the terms are used interchangeably in practice. The other point to note, which is sometimes used in order to explain the nature of a carried interest, is that a repayable carry is akin to a loan, whereas a non-repayable carry is akin to deferred purchase consideration. Neither are these particularly accurate as analogues which could be used to explain the concept of a carry.
There is usually also some debate to be had around whether the carried party should be entitled to receive any operational data generally or a vote at the operating committee (see 8.4) for the duration of the period in which the carried interest applies.
It is common to find a voting compact in favour of the carrying party as a condition of a carried interest. One argument in favour of this is that since the carried party is not paying its share of the costs associated with the performance of the JOA, it should have no right to a say at the operating committee (and should certainly not have the ability to render a blocking vote in respect of any proposal which is made to the operating committee), or to know the detail of the operational activities. This is similar to the suspension of rights which applies in respect of a defaulting party (see 18.4). On the other hand, at some point the carried interest might cease to apply and the carried party will return to the mainstream of paying its way under the JOA. At that point, the carried party might have been glad of the opportunity to comment at the operating committee and to have received certain operational data.
The existence of a carried interest, where the carried party surrenders its voting rights to the carrying party for the duration of the carried interest, alters the ostensible balance of the voting control in the JOA.
Where the JOA imports a carried interest arrangement, it might also be provided that the carried interest is personal to the carried party and will not continue to apply if the carried party transfers its interests in the JOA to a third party.
Whether the carried party or an incoming third party should be required to repay the amount of the carry to the carrying parties on a transfer of interests by the carried party will be a matter for negotiation in the JOA. A failure of the carried party to repay the amount of the carry when required might be grounds for frustrating the intended transfer to the third party and could result in an effective right of pre-emption being granted to the carrying parties. This repayment obligation will not bind the third party, since it is recited in a JOA to which the third party is not yet a party, but such a repayment obligation can be expressed to be a condition of the consent of the non-transferring parties to the proposed transfer, which will achieve the same result.
The relationship between the default remedies in the JOA (see Chapter 18) and the carry should be considered carefully. It might, for example, be possible that a default by the carrying party in paying the cashcalls or the invoice requests to which the carry applies could place the carried party in a position of default; in the extreme case this could result in a forfeiture of the carried party’s interests (of which the carrying party could well be a beneficiary), unless the carried party were able to make good the particular default. Although this situation might give a remedy for breach of contract in favour of the carried party against the carrying party (because of breach of the terms of the carried interest arrangement), this would not necessarily protect the carried party against the forfeiture of its interests.
The carry, or any further carry, might be suspended if the carried party has defaulted on a cashcall under the JOA (see 10.4), which could be the case when the carried party is not fully carried.
(a)The meaning of collateral support
‘Collateral support’ is a shorthand term used to describe the procurement by a party to the JOA of some form of additional support for the satisfactory performance by that party of its obligations under the JOA (which may be obligations of payment or of wider performance). That additional support is typically provided by a third party (which may or may not be related to the party required to procure the collateral support), although other forms of collateral support might be applied.
The application of collateral support (in whatever form it takes) in respect of a JOA is intended to allow the continued performance of the JOA by a party, despite the existence of financial difficulties that could inhibit the originally intended manner of performance by that party.
At the heart of the JOA is the expectation that the parties will pay their participating interest-based share of the costs of the joint operations and of any exclusive operations to which they are separately party. Therefore, it will be a key consideration that each party has money (or ready access to money) throughout the lifetime of the JOA.
The JOA will contain detailed mechanisms dealing with a party’s payment default (see Chapter 18) but concerns about the difficulty of recovering a debt from an already impecunious party, and concerns about the efficacy of the remedies suggested in the JOA for the loss of the defaulting party’s interests, suggest that prevention would be very much preferable to cure.
The JOA will set out various mechanisms for dealing with a party’s payment failure but that should not be regarded as a substitute for doing the best that can be done to ensure the initial and ongoing creditworthiness of each party. Hence the interest of the parties in applying various collateral support provisions to the commitments of the parties under the JOA.
The hypothesis that collateral support is not needed because of the JOA’s in-built payment default mechanisms is more tenable when the JOA and the concession are in their infancy, where optimism and the prospects for petroleum production and revenue returns are high, but as the JOA moves through its customary lifecycle (see 1.8), eventually towards governing the end of the useful life of the underlying assets, then it might be more appropriate to consider the need for collateral support more positively. The obligations of the parties to make payments in respect of the JOA will vary over the lifetime of the underlying petroleum project, and from that analysis it will be apparent that the need for collateral support will be at its greatest at any time when the petroleum project is consuming cash, rather than when it is generating revenue.
The terms of the prevailing petroleum law or of the concession could also require the concession-holder to post some form of collateral support in favour of the state in respect of its obligations under the concession.
The posture of the state on the suggested need for the provision of collateral support by the parties in respect of their obligations under the JOA could be variable, however. While this is principally an issue to be considered between the parties to the JOA, enlisting the support of the state entity that is responsible for overseeing the grant of a concession for the provision of collateral support under the JOA as a condition of participation by a party in the concession may be helpful.
As new petroleum provinces emerge and seek to attract investment, or as mature petroleum production provinces decline, there may be a temptation on the part of a state to lower the bar for new entrants in order to attract investment or to maintain production for as long as possible, and imposing stringent collateral support commitments might be inconsistent with such an approach. The reluctance of the state to require collateral support could be evidenced in respect of the approval of the terms of the JOA and also in respect of what collateral support the state might itself require directly from a party in its capacity as the concession-holder.
A party might argue that if it has not, in its capacity as the concession-holder, been asked to provide any collateral support under the terms of the concession, then neither should that party be required to provide any collateral support under the terms of the JOA. However, this convenient argument overlooks the reality that under the concession the liability of the parties together constituting the concession-holder to the state for performance of the obligations will typically be joint and several (see 17.4), and so the state might be more relaxed about the need for the provision of collateral support in respect of any individual party since it has the right to look at any or all of the parties in order to cover any individual party’s failure. Under the JOA, however, the liability of each party will be several and this could prompt a different attitude between the parties.
In most other commercial agreements the failure of a party to meet its obligation to procure collateral support would trigger an event of default, so allowing the other parties to terminate the agreement in respect of that failing party. However, this is rarely the case in a JOA, where the provisions defining a party’s default are typically written more restrictively (although the AIPN JOA does reference ‘default’ as including the failure of a party to provide security when required in certain circumstances; see 18.2).
(b)Applying collateral support to the JOA
In the initial selection of the parties to a first JOA, when a consortium of co-venturers is assembled in order to perform the requirements of a concession, care will be given to ensuring that those parties have the necessary technical and financial competence to perform the concession and the JOA. The considerations applying in the selection of the parties will also be relevant where the JOA has been preceded by a joint study and bid agreement (see 5.1), and will follow through to the tests for economic capability which condition the approval of a later proposed transferee (see 14.2).
In this instance, an assessment will be made between all of the parties as to their respective creditworthiness. It is generally the case at this stage, however, that if there are concerns as to a prospective party’s creditworthiness then that party will not be invited to join the consortium. It is not typically the case that a consortium would be willing to admit a party that has to be propped up with collateral support from the outset.
Nevertheless, at the point when they first form their joint venture, some or all of the parties could still require the provision of some form of collateral support in respect of their respective obligations under the JOA. Collateral support could be particularly relevant in the case of a company which suffers from relative economic weakness and which holds a relatively small participating interest across a number of JOAs, intent on trying its luck in a wide range of investment opportunities and defaulting upon or withdrawing from what it perceives to be the less lucrative opportunities.
The typical process of negotiation of a JOA rarely tends to place the issue of collateral support in respect of the parties’ obligations near the top of the commercial issues list. In part this may be attributed to the expectation that the parties are and will be suitably solvent and expect to perform fully their JOA obligations, due to their reluctance to risk the adverse impact on their reputation associated with a default or to jeopardise the prospective economic returns from the JOA. Consequently, a discussion about the need for collateral support at this early stage is often regarded as unnecessary.
A party could also argue that the provisions of the JOA that would result in the loss of that party’s produced petroleum entitlements or even in the loss of that party’s interests in the concession and the JOA (see Chapter 18) represent collateral support in their own right and so no further provision will be necessary.
Because of the deficiencies of the JOA default remedies in the phase of the JOA prior to the commencement of petroleum production (see Chapter 18) the JOA could require the parties to post collateral support, so as to give some meaningful protection against a default. The collateral support might be limited so that it applies in respect of the exploration and appraisal phase only, and could be structured so that it is released when the JOA moves into the production phase, on the basis that the entitlement to produced petroleum gives some value to the customary default remedy.
Notwithstanding that a party has procured no collateral support in respect of its commitments at the outset, during the lifetime of the JOA a party’s financial situation may deteriorate, and given the often significant duration of a typical JOA, this is a real possibility. The JOA could provide that in the event of such a deterioration (often summarised as a ‘material adverse change’, which could be determined according to the subjective opinion of any of the other parties or according to an objective test, such as audited proof that a defined financial ratio has been breached or the loss of an independently certified credit rating), the affected party should be required to procure some collateral support (a process sometimes known as ‘re-guarantee’). This is a relatively common arrangement in long-term commercial agreements but rarely, however, does a JOA apply this degree of foresight.
None of the AAPL JOA, the AIPN JOA or the OGUK JOA prescribes a requirement for the provision of collateral support by the parties, although the OGUK JOA does require the parties to commit to an agreement providing security for the eventual costs of decommissioning prior to the submission of a development plan in respect of a discovery.
The CAPL JOA allows the operator to call for the provision of security by a non-operating party in respect of its share of the costs of the joint operations if the operator has concerns about the creditworthiness of that non-operating party. The form of that security is not specified, although reference is made to the possible provision of an irrevocable standby letter of credit.16
The AMPLA JOA contains a series of provisions relating to the provision of what it calls cross-security by the parties as security for their cashcalls and commitments under the JOA.17 This cross-security mechanism has its antecedents in AMPLA’s mining joint venture agreement.
(c)Particular collateral support applications
The provision of collateral support in respect of the JOA is of particular application to several situations.
•Farm-out agreements – the terms of a farm-out agreement (‘FOA’) (see Appendix 1) might require the farming-in party to provide some form of collateral support for the obligations that it is required to perform under the FOA. This is perhaps understandable where a new party is prospectively coming onto the JOA (through the route of being a farming-in party), but this is less obviously tenable where the farming-in party is already party to the JOA and is simply increasing its participating interest and under the terms of the existing JOA there was no corresponding obligation to post collateral support for a work commitment. However, this is often the case under the terms of an FOA in these circumstances, and it represents a creeping collateralisation of the terms of the JOA.
There is also sometimes a temptation for the existing JOA parties to require a farming-in party to provide collateral support not only in respect of the work commitment represented under the FOA, but also in respect of certain further obligations anticipated under the JOA. There is no obvious reason for this, other than the desire of the parties to seek the comfort of collateral support even when it would not otherwise have applied.
Where a party coming into a JOA under an FOA agrees to post collateral support to the existing JOA parties in support of its prospective JOA commitments, that collateral support will usually not extend in favour of any later party that comes into the JOA.
Where a party coming into a JOA under an FOA agrees to post collateral support to the existing JOA parties in support of its prospective JOA commitments, that farming-in party is usually not successful in calling for reciprocal collateral support in its favour from the existing parties. This is so even if the financial covenant of the existing parties is the same as, or is even worse than, that of the incoming farming-in party. As a consequence of the above scenarios, there could be a lack of symmetry regarding the provision of collateral support in respect of the obligations of the parties to the JOA.
•Transfers – collateral support given by, or in respect of, a party must also be considered in association with the provisions of the JOA allowing a party to transfer its interests (see Chapter 14), so that there is certainty as to whether an existing item of collateral support will (or will not) continue to apply after a transfer has been effected. Replacement collateral support might also be required to be provided as a condition of a transfer.
•Decommissioning – the liability of a party to meet its share of the costs of decommissioning the petroleum production, processing, storage or transportation infrastructure used in the performance of the joint operations, and the provision of collateral support in respect of that liability, is considered separately (see Chapter 16).
•Exclusive operations – where a party undertakes an exclusive operation (see Chapter 13) that party will be responsible for all the costs associated with that operation and will be required to indemnify the non-participating parties against any residual loss or liability to which they are exposed as a consequence of the exclusive operation.
The non-participating parties might take the view that, while that participating party could be sufficiently creditworthy to meet its share of the costs of the joint operations, it is not sufficiently creditworthy when exposed to the increased financial profile presented by the exclusive operation. The non-participating parties will also be aware that they do not have a say in defining or controlling the extent of the risks which are undertaken within the exclusive operation. Because their indemnity is unsecured the non-participating parties could therefore require the provision of collateral support by the participating party as a condition of the permitted performance of the exclusive operation, but this is only a compellable right if the JOA is drafted to provide for it.
A policy of insurance that is provided by the participating party in respect of risks associated with the exclusive operation would operate as a form of collateral support in respect of the indemnity if the non-participating parties were also endorsed on the policy as co-insureds.
(d)Forms of collateral support
Collateral support can come in a variety of forms, and the most appropriate form must be selected for the particular commercial circumstances.
•Parent company guarantees – a parent company guarantee is a form of corporate guarantee given by an entity (often, but not always, the parent company of a party) in respect of certain contractual commitments of the guaranteed party. A parent company guarantee can present difficulties in application, since in practice it is unlikely to be honoured on demand and without question by the parent company, and further enforcement action by the beneficiary might be necessary. There is no industry-wide standard or model form parent company guarantee document, and so the terms of a guarantee will need to be negotiated. That said, most guarantees tend to follow a relatively formulaic structure.
A guarantee is a contract in its own right, and requires all the legal characteristics of a contract in order to be enforceable (and, additionally, is subject to the particular requirement of being in writing if it is to be effective under English law). A guarantee is usually written so that it can only be called upon by the named beneficiary in order to remedy a breach of an underlying contractual obligation, and not so that it can be applied electively by the guarantor in order to make good a default of the guaranteed party.
The guarantor promises to be responsible for the debt or default of the guaranteed party, and the guarantor’s liability under the terms of the guarantee will not ordinarily come into existence unless and until the guaranteed party fails to perform the underlying contractual obligation. Thus, the obligation of the guarantor to the beneficiary under the guarantee can be said to be secondary and not primary. The commitment of a guarantor in respect of a party might be set out in the body of the JOA (and that guarantor would be an additional signatory to the JOA), so that the guarantor gives a directly enforceable commitment to each party that is intended to be a beneficiary of that commitment. Alternatively, the guarantee commitment could be stated in a separate document, outwith the JOA.
•Bank guarantees – short-term liquidity concerns in respect of a party might be addressed by the issue of a form of guarantee by a bank or other financial institution. Bank guarantees take various forms and the associated nomenclature is often applied imprecisely. A demand guarantee (also called a ‘performance bond’) is essentially an unconditional undertaking by a bank to pay a specified amount to a named beneficiary, sometimes with reference to an underlying obligation but often with no reference to the need to evidence any default under that underlying obligation. For this reason a demand guarantee can be construed as a primary obligation, and is truly abstract and not a guarantee at all in the strict sense. The bank will be obliged to honour a demand guarantee in accordance with its terms, making payment on demand if so stipulated, without the application of any conditions.
The defences to a demand for payment that would ordinarily apply to a guarantor under a parent company guarantee will not apply in respect of a demand guarantee, and so a demand guarantee is less attractive to a guarantor. Standby letters of credit fulfil a similar function to demand guarantees, although they employ a different vernacular in their operative provisions because they are a form of documentary credit.
•Letters of comfort – it could be that a form of collateral undertaking referred to, or generally known as, a letter of comfort is issued in respect of a party’s JOA commitments. There is no settled form for a letter of comfort. Typically it takes the appearance of a letter issued to a nominated recipient by a person (commonly, but not exclusively, the parent company of the party to the JOA) wherein the issuer makes some or all of the following declarations to the recipient in respect of the party: that the issuer is aware of the obligations which the party has undertaken under the JOA; that it is the policy of the issuer to ensure that the party will be able to perform its obligations under the JOA at all times; or that the issuer intends to maintain its shareholding in the party as an affiliated party (at least for a certain duration) or will notify a prospective change in the level of that shareholding.
The essential issue to note here is the extent to which a letter of comfort casts the issuer in the role of a guarantor in favour of the recipient of the letter of comfort. This may be expressly disclaimed within the terms of the letter of comfort but, more commonly, this is left unsaid and will need to be addressed further. The extent of the commitment offered by the issuer will be critical where the recipient of the letter of comfort later seeks to enforce it against the issuer in the manner of enforcement of a conventional guarantee. Whether the letter of comfort can be so enforced will depend on whether it can be shown to have contractual force, creating an enforceable covenant against the issuer.
In the hands of the recipient, the letter of comfort could be taken to mean something more than simply an expression of good intention. It should be beyond doubt that any express covenants given by the issuer in the letter of comfort (for example to maintain a shareholding for a period of time or to notify changes of interest) are intended to create legally binding obligations that are enforceable against the issuer by the recipient. That is as far as the liability of the issuer may go (with the extent of the issuer’s liability for breach to be assessed as a matter of quantum). To amplify those obligations into a full guarantee (or similar) in respect of the party and the JOA may well take the letter of comfort beyond what was intended.
•Step-in rights – an alternative form of protection for a party is the possible existence of a step-in right, contained in a separate step-in agreement or direct agreement. In theory at least, where a step-in right exists in respect of a commercial contract, then in the event of a party’s failure to make payment when due, another party could step in to the defaulting party’s position in order to operate the defaulting party’s interests and to commandeer the revenues that would ordinarily be received by the defaulting party.
To structure an effective step-in right would require agreement and documentation beforehand between the parties and any relevant regulatory authority whose sanction may be required to allow such a step-in right to operate. Step-in rights, at least as described above, typically do not exist in the context of JOAs. The forfeiture remedy under the JOA (see 18.7) is effectively a form of step-in right in favour of each of the non-defaulting parties (subject to compliance with the conditions of the forfeiture remedy).
•Escrow arrangements – a party might be required to fund a defined bank account (to which the other parties have access, and called variously an escrow account or a locked-box account) with certain monies that the other parties can then draw down in the event of a default or a defined credit event affecting a party. The mechanism in the JOA for remediation of a default whereby the proceeds of sale of the defaulting party’s petroleum are held in escrow (see 18.4) represents a similar sort of arrangement. A similar arrangement could also apply in respect of the deposit of cash consideration paid to a farming-out party under a farm-out agreement (see Appendix 1).
The joint operations that are conducted under the auspices of the JOA will result in the creation of what is often referred to in the JOA as ‘joint property’. The broad intention of the JOA is that joint property will belong to all of the parties in the proportions represented by their participating interests.
The fifth round UK Continental Shelf model form (BNOC) JOA (see 1.7) applied a relatively simple definition of joint property, as “all property acquired or held for use in connection with the joint operations”. This definition was purposely simple yet all encompassing, and it is still used in the OGUK JOA.18
The AIPN JOA applies an expanded definition that covers physical infrastructure such as wells, facilities and equipment, materials, information, funds and property (other than hydrocarbons) that is held for use in the joint operations.19
In the CAPL JOA the definition of joint property includes the joint lands that the JOA governs and also all other tangible and intangible property held for the joint account.20
A definition of joint property is not applied in the AAPL JOA.
In an unconventional petroleum project the definition of joint property could be modified to include land and wider infrastructure interests (see Appendix 2).
Joint property can be disposed of by the operator, subject typically to operating committee approval (see 8.4) and the net sales proceeds accruing to the parties. This ability of the operator to freely dispose of joint property will also need to be read against the provisions of a production sharing contract which bestow property ownership upon the state (see Chapter 2).
If a civil law is selected to be the governing law of the JOA (see 20.4) then confirmation will be needed that the governing law permits the concept of joint property and allows the parties to hold joint property through an unincorporated association.21
1AIPN JOA preamble, §20.4; OGUK JOA §1.1.
2AAPL JOA §26.5.6; CAPL JOA §25.03.
3CAPL JOA §3.02.
4Such as the definition provided by Section 1159 of the Companies Act 2006 in respect of subsidiary companies and holding companies, which is applied in the OGUK JOA.
5OGUK JOA §9.8.2.
6AIPN JOA §1.1, §3.3(A); OGUK JOA §4.
7Burton v Camden LBC [2000] 2 AC 399.
8Cowcher v Cowcher [1972] 1 WLR 425.
9CAPL JOA §1.05A.
10AAPL JOA 610 §III B.
11AAPL JOA 710 §§2.29, 8.1.
12AAPL JOA §2.51.
13AAPL JOA §1.2.
14CAPL JOA §1.01.
15OGUK JOA §21.1.
16CAPL JOA §5.03.
17AMPLA JOA §11/Schedule 5.
18OGUK JOA §1.1.
19AIPN JOA §1.1.
20CAPL JOA §1.01.
21See Reg Fowler, “Joint Property and Joint Ventures; the Laws of Unintended Consequences” (2015) 8(31) International In-House Counsel Journal (IICJ).
