Finance litigation update - June 2020

FINANCE LITIGATION UPDATE – JUNE 2020 2 Implied terms, relational contracts and good faith: Taqa Bratani & Ors v Rockrose Overview When and why will the courts imply a term into a contract? This vexed question was recently considered by the courts in Taqa Bratani & Ors v Rockrose UKSC8 LLC [2020] EWHC 58 (Comm) . The judgment is particularly of interest because it applies the general principles of the implication of terms in the context of the developing law on relational contracts, good faith, and the “Braganza” duty. In this case, although the court concluded the contract was possibly a relational one, it did not imply any terms. Background The claimants (“Taqa Bratani”) sought declarations that they had validly terminated the appointment of the defendant (“Rockrose”) as operator of various oil and gas fields in the North Sea. Rockrose had been appointed under a series of joint operating agreements (“JOAs”). Although the JOAs permitted termination on 90 days’ notice, Rockrose argued this was subject to either: 1. An implied term qualifying the exercise of the right to terminate by the concepts of good faith and genuineness and the absence of arbitrariness (relying on Braganza v BP Shipping Limited [2015] UKSC 17 , the “Braganza” duty); and/or 2. By similar obligations of good faith arising from the characterisation of the JOAs as “relational contracts” (relying on Yam Seng Pte v International Trade Corp [2013] 1 All E.R. (Comm) 132 ). A question of construction Before considering the implication of terms, the court analysed the express words of the contract (a contract must be construed before any additional terms can be considered). In summary, bearing in mind this was a sophisticated contract where textual analysis was paramount, the court concluded that the language was unambiguous and conferred an absolute right to terminate on 90 days’ notice. It judged that other clauses in the JOAs (where, for example, the parties had expressly agreed that they were entitled to vote in favour of their own interests) were consistent with this analysis. Further, the court largely disregarded the evidence relied upon by Rockrose because it post-dated the date the JOAs were entered into. The court also ruled there was nothing within the factual or commercial matrix which suggested the natural meaning of the words was wrong, still less apparently illogical or incoherent. When will a term be implied? The court re-stated the general test for implying terms as follows: 1. Is the term necessary to give business efficacy and / or is it so obvious that it goes without saying? 2. Is the term fair and / or is it one the court considers the parties would have agreed to had it been suggested? 3. A term will only be implied if it does not contradict the express terms of the contract. In addition to these points, the court emphasized that the necessity test should not be watered down: fairness, equity or the improvement of the contract were not sufficient. Could a term be implied under the Braganza duty? The first basis upon which Rockrose argued a term should be implied was pursuant to the Braganza duty. This means that a contractual discretion must be exercised in a manner which is not arbitrary, capricious or irrational. HHJ Pelling QC was clear that in his view it was important to undertake the detailed textual and contractual analysis before considering whether a Braganza duty existed. The starting point for him was that it was hard to consider the implication of any term where the wording of the contract was unambiguous and it was neither necessary for business efficacy, nor so obvious that it went without saying, that such a term should be implied. Secondly, while recognising that this is an “ incrementally developing area of the law ”, he concluded that the Braganza doctrine simply does not