LONDON, January 18, 2019 – Baker Botts, a leading international law firm, has achieved a major litigation victory on behalf of Marathon Oil UK LLC in the English Court of Appeal. The case was one of the largest to come before the English courts in recent years in the energy sector and is the latest in a series of high profile victories for Baker Botts’ UK litigation team.
“This is an important decision not only because of the amount of money at stake. The joint operating agreement that the Court was required to interpret is based on a standard form used widely in the industry. Because these agreements are often subject to arbitration clauses, this was a rare opportunity for an English court to clarify the rights and obligations of operators and participants alike in the pension context,” said Chris Caulfield, Litigation partner in Baker Botts’ London office.
“We are delighted that the Court decided to endorse our client’s position entirely,” added Mr. Caulfield.
Marathon had claimed against a number of its joint venture partners for reimbursement of tens of millions of pounds of pension related costs incurred in Marathon’s role as the operator of certain hydrocarbon fields in the UK North Sea. In a Judgment handed down on January 17, 2019, the Court of Appeal unanimously upheld Mr. Justice Knowles CBE’s earlier ruling in the High Court in Marathon’s favour.
The unsuccessful parties, Spirit Energy Resources Limited (formerly Centrica Resources Limited), Taqa Bratani Limited and Taqa Bratani LNS Limited were ordered to make payment of Marathon’s legal costs under the UK’s “loser pays” rule.
The case is of key relevance to joint venture arrangements in the energy sector where assets are often operated by one joint venturer, with that operator being reimbursed for its costs by the other joint venture parties.
Background to the Case
On 21 February 2018, Mr Justice Knowles CBE, sitting as a Judge of the English High Court, ruled in favor of Marathon and issued a judgment requiring Marathon's partners under two operating agreements to reimburse it for pension-related costs incurred as the operator of certain hydrocarbon fields in the Brae Area of the UK North Sea.
Mr Justice Knowles CBE found for Marathon on all points relating to liability and rejected the Defendants' counterclaims. He held that, under the relevant agreements, the Defendants were required to reimburse Marathon for their portion of the pension deficit recovery payments.
He reasoned that (i) Marathon employed the pensions scheme members on Brae Area operations under budgets approved by the Defendants, (ii) Marathon conducted the operations on which the scheme members were employed under the supervision of the operating committee for the Brae Area, (iii) the Defendants received the benefit of the scheme members' work, (iii) the agreements authorised Marathon as the operator to determine remuneration, and (iv) under the agreements, Marathon was neither to gain nor lose by virtue of its being the operator. On that basis, the Defendants could not refuse to pay their share of the pension deficit funding or to approve budgets that included charges for that share.
The decision was appealed to the Court of Appeal by the Defendants. The Court of Appeal in its Judgment of 17 January 2019 unanimously upheld the lower court’s decision and dismissed the Defendants’ appeal. The key aspects of the Court of Appeal’s reasoning were that:
- The purpose of the relevant agreements included ensuring equity between the participants and holding the Operator neutral in relation to both gains and losses. The Court considered that the effect of the agreements was that the participants in the joint venture must bear the charges together.
- The charges arose out of terms and conditions of employment which Marathon entered into with employees and, as such, were part of the costs and expenses of authorised and approved operations; the resulting costs and expenses were, therefore, to be borne by the participants in the joint venture.
- Any other interpretation of the agreements was not a “commercially sensible construction” and there was “no identifiable logic whereby the participants in the joint venture can take the benefits but avoid the risks."
- The Appellants’ argument that Marathon should not be given a “blank cheque” to spend the joint venture participants’ money was also dismissed. The Court noted that (i) the operating committee upon which the joint venture participants were represented was appraised of the relevant facts, (ii) it was in the nature of the operations that the authorisations covered costs which, at their time of approval, may be uncertain in scope, (iii) the joint venture participants were always protected by the general principle of common law that Marathon was required to exercise its contractual discretion honestly and in good faith.
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