Excalibur v Gulf Keystone: a victory for common sense

The Facts

The facts are well known within the industry, but to recap in very broad summary: Excalibur and Texas Keystone (“TKI”) entered into a so called ‘Collaboration Agreement’ (“the CA”) in February 2006 with the aim of collaborating “to pursue and ultimately prepare bids to acquire by way of Consortium Bids…and develop petroleum blocks in Iraqi Kurdistan”, and “in the event that Consortium Bids are successful to produce and sell and/or export petroleum resulting there from”. The CA was, in essence, a fairly standard JBA based broadly on a North Sea precedent.

Excalibur brought a number of different claims before the English Commercial Court. Excalibur alleged that Gulf Keystone, despite not being a party to the CA, had become a party to it and had breached various obligations within the CA including fiduciary duties allegedly arising from it, or which arose as a matter of the commercial relationship between Gulf and Excalibur. Gulf vigorously disputed these claims and has ultimately prevailed on every single issue.

The Key Learning Points

JBAs, be they an oil company’s in-house document or the AIPN Model Form International Study and Bid Group Agreement, are very common in the International Upstream oil and gas industry. There are many good reasons for even the largest Upstream player to enter into a JBA, for example, mitigation of the financial risks of exploration or pooling of technical expertise and knowledge.

What will come as a great surprise to many in the exploration industry is the suggestion that a JBA gave rise to fiduciary obligations including a duty to grant an interest in a PSC to a person who chose not to sign and pay monies due under the PSC.

Fiduciary duties would typically require you (i) not to do anything conflicting with the interests of a co-bidder, (ii) not to prefer your own interests to the interests of a co-bidder and (iii) tohold a co-bidder’s share on trust for them.

Many in the Upstream industry would find the imposition of such onerous duties startling in both commercial and legal terms. Indeed, it was Gulf’s position that the parties’ relationship during the terms of the JBA was simply governed by the contract, which left the parties free to choose whether or not to bid for a PSC. The Court accepted Gulf’s position and there are many good commercial reasons why the Court should have decided this way.

Parties to a JBA are in a joint venture, in a loose sense, but typically decide for themselves whether and, if so, on what terms they will join in or make a bid for exploration rights. It is critical that the JBA parties are free to act in their own interests because each might well have their own, possibly very different, views of the technical and commercial merits of an asset. Those views will inevitably impact on the bid price. A party with existing assets nearby might seek an opportunity to achieve synergies and therefore be prepared to make a higher bid. Without such existing interests, another member of the joint venture would wish to bid less. JBAs thus typically provide that each party may choose whether or not, or on what terms to bid, so as to avoid the conflict that could arise if all are bound to act together or not at all.

Although JBAs typically contain non-circumvention provisions, the Commercial Court decided that within the Upstream oil and gas industry JBAs are arm’s length commercial agreements between sophisticated organisations specifying the rights and obligations of the parties and that they do not create fiduciary obligations going beyond the written provisions.

Finders Contracts

Introducers or finders are a relatively common feature of the International Upstream industry.

The Court noted that an introducer is not in a fiduciary relationship with those who enter into an E&P contract. This prevents introducers from seeking a slice of the profits that generated from a deal arising from their introduction. The attractions of this basis of claim are immediately apparent to an introducer who very likely bore none of the commercial and financial risk of exploration but seeks toshare in the profits of a successful exploration. The English Courts are very likely to reject such claims by introducers who do not have a written contract for a profit share.

Date of Breach Valuation

One of the key legal findings was that Excalibur’s claim to damages (had it been successful) would have been valued as at the date on which Gulf Keystone entered into the Shaikan PSC in early November 2007. This is the normal starting date for any valuation exercise but there are English authorities that allow, in exceptional circumstances, post-breach events to be taken into account if necessary to achieve proper compensation for the loss suffered. Unsurprisingly, Excalibur sought to rely on discovery of oil in 2009. Significantly, the Court accepted that the value of a participating interest in a wildcat exploration block, even in a highly prospective play fairway, was zero or close to zero at the date of signing the Shaikan PSC in November 2007.

Ready Willing and Able

Excalibur sought specific performance (i.e. effectively a court ordered farm in) of an alleged 30% of Gulf Keystone’s participating interests in the Shaikan and other blocks despite having paid nothing towards the exploration costs. The Court held that a party to a JBA must be ready willing and able to pay its share of the bid price and exploration costs. A party who cannot do so is in material breach of a JBA.

The Judge was emphatic in his ruling that Excalibur had to be ready, willing and able to pay its way and that its inability to do so at the time for payment of the signature bonus was fatal to its claim.

The Judge’s findings are a clear steer as to how English Courts will likely decide these questions in future. A litigant who sits tight before making a claim and does not fund its share of expenses until oil is found will not succeed.

The Commercial Response to the Potential Legal Problem

First step, protect against potential liability by making any future JBA subject to English law and jurisdiction as there is now a very clear precedent as to how an English court will likely resolve a similar dispute. All cases turn on their own facts but most JBA disputes are likely to be rather more straightforward than this factually complex dispute. Accordingly, it is likely that an English Court hearing a JBA dispute will come to similar conclusions.

Second, be absolutely explicit in the drafting of any JBA. State that it is not intended to and does not create any interest in the licence granted as a result of a joint bid or give rise to any fiduciary duty or relationship (e.g. partnerships, agency or joint ventures) that could give rise to such duties as such express disclaimers are highly persuasive.

Summary

Companies of all sizes in the Upstream industry should review carefully their precedent JBA and consider whether they need to be amended in light of the facts and legal conclusions of the Excalibur litigation. Better to spend time and care now in drafting documents that are, perhaps, taken for granted than bear the time and expense of a heavy trial or arbitration.

Harvey Rands