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North Sea Oil JOA Appeal Dismissed

The Court of Appeal has today unanimously dismissed an appeal by two participants in a North Sea oil joint venture, Centrica and TAQA, against a judgment of Robin Knowles J holding them liable to pay their share of pension scheme deficits incurred by the operator in relation to the joint operations.

The proceedings arise out of the fact that Marathon Oil, as operator of the Brae oil fields, has retained talented employees to conduct the operations and has (until recently) afforded them pension benefits under a defined benefit pension scheme. During a period of historically low long-term bond yields, and in common with the experience of pension schemes worldwide, actuarial valuations have revealed deficits in the Scheme’s assets over its liabilities, resulting in the need for deficit recovery charges (“DRCs”) to be paid to safeguard the financial integrity of the Scheme. As with other staff costs, Marathon has sought to pass on these charges to the participants.

Until 2014, the participants paid these charges without objection. However, since 2014, Centrica and TAQA have disputed whether they are liable to contribute to the DRCs under the terms of the Joint Operations Agreement (“JOA”), contending that the Operating Committee did not approve the incurring of the pension deficits at the time when the underlying operations were being conducted. They also argued, at first instance, that Marathon owed fiduciary duties to the participants and breached those duties by failing to give full disclosure about the benefits afforded under the pension scheme.

Following a four-day trial in November 2017, Robin Knowles J found for Marathon and held that the participants were contractually liable to pay their share of the DRCs attributable to joint operations. Without expressing a concluded view on whether Marathon owed fiduciary duties, he held that no breach of such a duty was made out on the facts. His judgment is available at http://www.bailii.org/ew/cases/EWHC/Comm/2018/322.html.

Centrica and TAQA appealed, with permission granted by Leggatt LJ. The Court of Appeal (Hamblen, Henderson and Green LJJ) has now dismissed the appeal. The sole judgment was given by Green LJ. He held that the normal and ordinary meaning of the JOA, including by reference to its purpose, compelled the conclusion that the participants must bear the DRCs (para 41) and that the appellants’ commercial arguments were “counterintuitive and lacking in commercial logic” since it would not be “commercially rational” for the participants to enjoy the benefit of the operations that had given rise to the DRCs, but none of the burden (para 45). The full Court of Appeal judgment is available here.

David Wolfson QC and Conall Patton acted for Marathon, instructed by Baker Botts (UK) LLP.