Joint Operating Agreements. Peter Roberts
on an examination of the characteristics of the particular JOA, in light of the prevailing law of partnership, but it is also worth considering what the consequences of being found to be in a partnership actually are.
(a)The definition and the consequences of partnership
The phrase ‘joint venture’ is not a term of art in English law and is not defined judicially or statutorily. English law has created a statutory definition of a partnership, under the Partnership Act 1890, as “the relation which subsists between persons carrying on a business in common with a view of profit”.3 This relatively simple and somewhat opaque statement is then amplified by the application of several statutory rules that are intended to be applied in determining whether a partnership exists,4 of which the most relevant to the position of a JOA are as follows.
•Any joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use of any of those components.
•The sharing of gross returns does not of itself create a partnership, whether or not the persons sharing such returns have a joint or common right or interest in any property from which, or from the use of which, the returns are derived.
•The receipt by a person of the share of the profits of a business is prima facie evidence that such a person is a partner in the business, but the receipt of such a share or of a payment contingent on or varying with the profits of a business does not of itself make a person a partner in the business.
In its ordinary meaning, therefore, a joint venture such as that represented by the terms of a JOA could have the appearance of being a relationship that fulfils the legal definition of a partnership.
A partnership need not be specifically constituted or operated as such, and a partnership can come into existence inadvertently between a group of persons carrying on business together if their activities can be proved to have met the necessary definition. On the other hand, the parties might actively wish to form a partnership. In this latter case the more common route is that the parties will enter into an express partnership agreement, rather than relying on the implication of the statutory terms of a partnership. The express partnership agreement will recite and modify the terms that are implied by the Partnership Act.
Being in a partnership can have some consequences that the parties might be anxious to avoid the implication of in their JOA relationship (although it is also fair to say that sometimes the spectre of casting the JOA as a partnership is raised with an eye to consequences that might be more imagined than real).
•Taxation – in the United Kingdom at least, under a JOA a party (assuming that party is an incorporated person) will be liable to pay corporate income tax on the revenues resulting from the subsequent realisation of any petroleum that is produced, subject to a deduction of the expenses incurred by that party in connection with the production of that petroleum. Under a partnership, the individual partners will be taxed on the net profit that they each generate from the partnership’s activities (rather than that the partnership be taxed as a distinct entity). Thus, the net position may be that there is no material difference from a taxation perspective to a person that is a partner in a partnership or a party to a JOA, and so the concern about the existence of a partnership in this respect should be considered accordingly.
•Contracting limits – under a JOA it is ordinarily the case that the parties will agree that only the operator will have the authority to bind the parties, and that the operator is appointed to act as the agent of the parties. Thus, the operator will contract in that capacity with third parties (see 7.8). Each of the parties will be jointly liable as a matter of law to any third party, unless the third party has expressly agreed to limit its rights of action so that it may proceed against the operator only. The third party might also agree that if it has rights against all of the parties, their liabilities to the third party will be several and not joint (see 17.4). Each partner can contract with a third party and each partner can bind the partnership (and the liability of the partners will be joint),5 unless the partnership agreement restricts that authority as between the partners and any third party that deals with the partners knows of that restriction.6 The partners might also agree that any liability that they might have in a contract with a third party will be several and not joint, if this can be agreed with the third party. What is common to both the partnership and the JOA relationships outlined above is that the liability of the partners or of the parties to any third party could, depending on the terms of the contract with the third party, be limited to the liability of one partner or one party, or could be joint or several. The allegation of the existence of a partnership between the JOA parties might be attractive to a third party that has contracted with the operator without the benefit of, or a direct right of recourse to, the non-operating parties. The liability position to which the partners in a partnership are subject could be used as a means of delivering the joint and several liability of all the parties in favour of that third party.
•Fiduciary duties – the relationship between partners is essentially fiduciary in nature because of the very nature of the mutuality of trust that a partnership imports.7 Thus, the implication of a partnership will lead to the implication of certain fiduciary duties which would then have to be managed. Under the JOA there are circumstances which might give rise to the allegation that fiduciary duties exist (see 7.8). If the JOA is clear about how it addresses the possibility of fiduciary duties, in whichever manner those duties might arise, this might be less of a concern (but the JOA is often deficient in this regard).
In summary, there might be little real distinction between a partnership and a JOA in light of the various consequences, and the effort that is put into distinguishing the JOA from a partnership could have little practical purpose.
(b)The JOA as a partnership
Most JOAs include a recital that the JOA relationship does not constitute a partnership (whether expressly or by implication).8 Despite this it is the substance of the relationship that the JOA creates, rather than the form of the JOA and the simple denial that a partnership exists, which must be considered. It has been judicially noted9 that “it is not in the least conclusive that the partners have used a term or language intended to indicate that the transaction is not that which in law it is”.
The point at issue, therefore, is whether, upon careful consideration of the substance of the JOA, the unincorporated joint venture between the parties that is represented by the JOA might in fact constitute a partnership for the purposes of English law.
In order to assess whether a JOA constitutes a partnership, it might be helpful to analyse further some of the aspects of a typical partnership, and to apply that analysis against the analogous provisions of a JOA in order to illustrate certain similarities and differences.
•Contributions and distributions – in a partnership, each partner is required to contribute a share of the capital, which is then pooled and is to be employed in the business of the partnership. Each partner will thereafter expect to receive a distribution of cash out of the profits of the business of the partnership. In the JOA, each party will from time to time contribute its participating interest-based share of the costs necessary to allow the performance of the joint operations through the cashcall or the invoice request provisions (see 10.4), rather than there being an upfront pooling of capital contributions. The distribution that each party receives is one of its net petroleum entitlements in kind at the defined delivery point (see 12.2), rather than a share of the profits of the business as a whole. However, if the JOA does not inhibit the ability of the operator to impose a single pre-funded cashcall to meet future expenditure expectations, such that there is effectively a pooling of capital for development purposes, or if the JOA allows the operator to sell the produced petroleum on behalf of all the parties and then to account to the parties for their share of the sales proceeds, such that there is something like a cash distribution out of the profits of the business, then either of these aspects might be capable of being read as indicative