English Court Considers Whether 'Braganza Duty' And Duty Of Good Faith Qualify Termination Rights

In TAQA Bratani Limited and others v Rockrose1 the High Court has recently considered whether Joint Operating Agreements ("JOAs") are relational contracts and whether the contractual rights in JOAs are subject to any implied duties, including a duty to act rationally and/or in good faith.

This decision provides some helpful clarification for parties involved in JOAs or similar agreements in relation to the question of whether (and to what extent) implied duties of good faith may be read into their contracts and whether unqualified termination rights are implicitly restricted by the duty to act rationally.

Background

The Defendant ("RRUK") was the Operator of five oil and gas field blocks on the UK Continental Shelf pursuant to four JOAs and a Unitisation and Unit Operating Agreement (which contained substantively the same terms, so far is relevant to this dispute). Pursuant to the terms of the JOAs, RRUK could be discharged by the Operating Committee giving not less than 90 days' notice. This right was unqualified by the express terms of the JOAs.

The First Claimant ("TAQA") served notice to transfer the operatorship of the field from RRUK to the another operator (the "Notice"). The Notice required transfer of the operation to be completed within 365 days of the Notice being sent.

RRUK refused to accept the validity of the Notice. RRUK asserted that the circumstances of its dismissal were unprecedented in the North Sea oil and gas business - and argued that TAQA's contractual power and discretion to transfer ownership was limited by an implied duty to act in good faith and/or an implied duty not to exercise its right of termination improperly, or arbitrarily or irrationally.

Trial in respect of a single preliminary issue was heard in December 2019. The issue to be determined was framed, as follows:

"Whether, as a result of a term to be implied in or on the proper construction of each JOA, the exercise by each claimant as a participant of its right to vote for the termination of the operatorship was subject to constraints that it be exercised (i) in good faith, (ii) for proper purpose, and/or (iii) [not] otherwise arbitrarily or irrationally".

Legal arguments

RRUK argued that each of the termination provisions within the JOAs were subject to:

an implied term that qualified the manner in which it may be exercised by concepts of good faith, and genuineness and the absence of arbitrariness, capriciousness, perversity and irrationality (often...