Background
Participants in natural resource projects may decide, for a number of reasons, to participate alongside other companies. In these situations it is common to establish unincorporated joint ventures where the rights and responsibilities of the parties are set out in Joint Venture (or Joint Operating) Agreements (here, a “JOA”).
Standard model JOAs are developed and issued by the Association of International Energy Negotiators (which until December 2021 was the Association of International Petroleum Negotiators); the latest standard is the 2023 model JOA (the “2023 MJOA”). They are deliberately designed to be applicable in a range of jurisdictions, although most will be subject to English law regardless of where the actual project is found.
In the context of Tanzanian E&P, a JOA initially governs the relationship between commercial companies. Should a discovery be made, TPDC has the right under the Production Sharing Agreement (the “PSA”) to participate in some fashion, and it does this by becoming a party to the JOA. This participation requires there to be some changes, more notably the obligation, under Section 11 of the Natural Wealth and Resources (Permanent Sovereignty) Act (CAP. 449 R.E. 2023), to ensure that Tanzanian law is used as the governing law, and that judicial bodies or other bodies (e.g. arbitral tribunals) in the United Republic of Tanzania are incorporated into the contract. In so doing, the original participants may lose protections or advantages that they had agreed under English law and may want to put in place a separate agreement between themselves to address these.
The structure of a JOA is relatively straightforward: it will typically include mechanisms to ensure payment of bills; the appointment, rights and obligations of an operator that represents the joint venture; how operations are to be conducted, including in some cases by less than all the parties to the joint venture; how disputes are to be resolved; and how non-performing co-venturers are to be treated. This non-performance may sometimes be due to financial difficulties that can end in insolvency and bankruptcy, and the question we are looking at is how, at that stage, the insolvent or bankrupt party can be forced out.
The JOA
Let us look first at the JOA, the starting point of which (as retained in the 2023 MJOA) is that a non-defaulting party can require a defaulting party – that is, one that has failed to make payments to the joint venture when due – to completely withdraw from the JOA and the PSA and transfer its participating interest to the non-defaulting parties at no cost.
It is this provision, without more, that could fall foul of the anti-deprivation rule. It may be recalled that this rule is aimed at preventing assets from being removed from a company, or from a person, on bankruptcy, thus reducing the value of the insolvent estate and potentially undermining the interests of creditors.
Where the person receiving the asset is also a creditor (and the provisions of the JOA are engaged because the defaulting party has failed to make payments to the joint venture, thus making the other participants, creditors) such a transfer can also breach the pari passu rule. This rule holds that all unsecured creditors should share in the available assets in a proportionally equal manner, and applies equally on bankruptcy or liquidation.
In anti-deprivation cases, the good faith and the commercial sense of the transaction have been a substantial factor in determining whether the recovery of the asset without compensation is lawful. One cannot contract out of the pari passu principle and here it does not matter whether the transaction is a sensible commercial arrangement not intended to circumvent the principle. Neither rule is engaged if the asset is forfeited before bankruptcy or liquidation and so defaulting and non-defaulting parties have very different drivers at this stage.
From the defaulting party’s perspective, and depending on the jurisdiction, ‘becoming insolvent’ could mean becoming cashflow insolvent (where the company cannot pay its debts as they fall due) and / or becoming balance-sheet insolvent (where the current assets are less than the current, prospective and contingent liabilities, weighted appropriately, and where the company might not be able to pay debts as they fall due at some point in the future). Either way, a company worried about its solvency might decide to enter administration quickly to engage the anti-deprivation rule, especially given the weight that a board of directors must give to the interests of creditors under those circumstances.
From the perspective of the other parties, delaying action could mean that, instead of a clean joint venture of timely payers, they must deal with a trustee in bankruptcy or, potentially, even hold the defaulting party’s interest in trust. Commercially, this could increase the financial burden on each of the other parties, although whether this is significant will depend on the circumstances (a JV with cashflow from operations may find it a lot easier to carry a defaulter than it would if it was at the exploration phase). To avoid this, the JOA may need to consider how it might compensate a defaulting party for any loss of its interest in the JOA.
The PSA
But what might the loss suffered by a party removed from the JOA be? If the JOA is a document that governs the relationship between the coventurers, establishing how money is spent and distributed, then the value of participation is a reflection of the value of the PSA (at its simplest, if there is no PSA, then no money flows into the JOA for distribution to its participants).
The Mainland’s 2013 Model Production Sharing Agreement (the “2013 MPSA”, which is being reviewed) states at Article 4(e) that the “Agreement shall come to an end where the Contractor … becomes insolvent or is declared bankrupt by a court of competent jurisdiction”. By contrast, the Zanzibari 2017 MPSA (the “2017 MPSA”) allows for discretion: “The Minister may terminate the Agreement where the Contractor…becomes insolvent or is declared bankrupt by a court of competent jurisdiction”) (emphasis added).
Article 4(j) in both the 2013 MPSA and the 2017 MPSA state that “Where two or more persons constitute the Contractor, the [relevant authority] shall not, under this Article, terminate the Agreement on the occurrence, in relation to one or some only of the persons constituting the Contractor, of an event entitling the Government to so terminate this Agreement, if any other person or persons constituting the Contractor…”. Notwithstanding the generally clumsy drafting of the MPSAs when dealing with the ‘Contractor’, the intention is clearly to avoid punishing a well-behaved party to the PSA. The anti-deprivation rule is adopted in Tanzanian law under the provisions of section 2(3) of the Judicature and Application of Laws Act [Cap. 358 R.E. 2023], but the Mainland’s 2013 MPSA does not provide for any compensation for removal (neither does the Zanzibari 2017 MPSA).
Contractually, the joint venture as a whole is responsible for any obligations to TPDC under the PSA. If there is no JV but only one participant then it might also be a creditor and the pari passu principle might be engaged, but not if there are several coventurers under a JOA where the solvent parties would be expected to satisfy the joint obligations. One can see how a failure under the JOA could lead to others under the PSA, and this may be exacerbated once TPDC becomes a (usually carried) signatory to the JOA.
Discussion
This arrangement sets up an interesting tension. If the Contractor is removed under the provisions of the PSA, then it is up to the licensee (as the owner of the licence under which the contractor carries out work) or the Government to provide compensation or justify why it should not. If the Contractor is removed under the provisions of the JOA then it is up to the co-venturers to do so. The Government and the licensee would prefer that the defaulting party be removed under the JOA; the JOA coventurers would prefer that it happen under the PSA. The insolvent company, and its creditors, should not care.
Whether the anti-deprivation rule and the pari passu rule are be engaged at the relevant level will depend on when any loss of asset is required, whether it is commercially fair and the degree of compensation for that loss (if any). Clearly the interplay between the PSA and the JOA, and the conditions under which a defaulting party is removed from either, require more thought that is usually given to it when negotiating the joint venture agreement.
About the Author
David Mestress is a Consulting Partner with RIVE & Co. He specialises in regulatory compliance and commercial risk within the extractive industries. He can be reached at: david@rive.co.tz
Disclaimer
Please note: This article is intended for general information purposes only and does not constitute legal, tax, or professional advice. While the information is based on public legislation and is believed to be accurate at the time of publication, it is subject to change. Readers should not act upon this information without seeking professional legal counsel tailored to their specific situation. RIVE and the author expressly disclaim any and all liability with respect to any actions taken or not taken based on the contents of this publication.