Why your operator does not always love you: some observations on gross negligence, wilful misconduct and consequential loss*
Stephanie Rowland A and Bethwyn Douglas BA Minter Ellison Lawyers Level 49, Central Park, 152-159 St Georges Terrace, Perth. Email: stephanie.rowland@minterellison.com
B Minter Ellison Lawyers Level 49, Central Park, 152-158 St Georges Terrace, Perth. Email: bethwyn.douglas@minterellison.com
The APPEA Journal 50(2) 682-682 https://doi.org/10.1071/AJ09046
Published: 2010
Abstract
Due to the nature of the role of operator under a joint operating agreement (JOA), the operator is potentially exposed to a large magnitude of risk. As a result, JOAs typically include clauses intended to allocate and limit liability between the parties.
A JOA may also include clauses that release the operator from liability and provide that the participants must indemnify the operator for liability that arises in performing its functions as operator. However, such clauses often contain carve-outs that attempt to make the operator liable if loss is caused where the operator’s conduct, or that of its senior personnel, constitutes gross negligence or wilful misconduct.
Given the magnitude of loss that may potentially be incurred by participants under a JOA, it is vital that participants understand the impact of their JOA on their exposure to liability and, in particular, the current interpretations of the terms gross negligence and wilful misconduct likely to be applied by Australian courts.
This paper considers the practical operation of such clauses and explores:
the ability of a participant to claim consequential loss against the operator and what type of loss is likely to constitute consequential loss; and,
practical avenues available to participants of a JOA to minimise the risk of liability by way of drafting, including the effect of a limitation of liability clause on the ability of a JOA participant to recover from the operator.
Keywords: gross negligence, wilful misconduct, consequential loss, operator, JV participants, senior supervisory personnel, limitation on liability, indemnity, JOA, AIPN
Stephanie is a specialist in mergers and acquisitions and joint venture structuring work focussing on the energy and resources sector. This work includes providing commercial and regulatory advice on complex resource, gas and mining projects and contract negotiation. Stephanie also has significant experience in intellectual property work. Stephanie’s energy and resources experience includes acting for publicly listed and private resource companies in joint ventures in Australia and abroad. A recent project includes acting for a publicly listed international exploration and production company Australian oil and gas company with interests in Australia and abroad to farm-down its equity interest in projects located in South East Asia. Stephanie also works with Minter Ellison’s African Centre of Excellence. Member: State Committee for the Australian Resource and Energy Law Association (AMPLA) in Western Australia. |
Bethwyn practices principally in commercial and corporate law. She has a focus in particular on the energy and resources sector and corporate transactions and projects and has experience in a wide range of areas including resources, gas and mining and electricity. Bethwyn has experience in a number of areas including drafting, negotiating and advice work. Bethwyn’s specific project involvement includes acting for a major Australian company in respect of the on-sale of gas from the North West Shelf, including preparing and negotiating gas sale agreements and gas swap agreements. Member: State Committee for the Australian Resource and Energy Law Association (AMPLA) in Western Australia and the Chamber of Minerals and Energy’s Infrastructure and Economics Committee. |
References
For example, in the Association of International Petroleum Negotiators (AIPN), Model International Operating Agreement—2002. AIPN Model Contracts, 2002 (Model JOA), in Article 4.6B the non-operators ‘defend and indemnify’ the operator (and the ‘indemnitees’, being the operator’s affiliates and their respective directors, officers and employees) ‘from any and all damages, losses, costs, expenses (including reasonable legal costs, expenses and attorney’s fees) and liabilities incident to claims, demands or causes of action brought by or on behalf of any person or entity, which claims, demands or causes of action arise out of, are incident to or results from joint operators’. The parties agree to do so regardless of any ‘gross negligence’ or ‘willful misconduct’ of the operator. In optional provision Article 4.6C, which the parties may include, there is a carve out from this indemnity (and the release from liability in Article 4.6A) if the ‘senior supervisory personnel’ of the operator or the operator’s ‘affiliates’ engage in ‘gross negligence / willful misconduct’ (as these terms are defined in the Model JOA). Interestingly enough, this defined term ‘gross negligence / willful misconduct’ is only used in Article 4.6C, and not Articles 4.6A or 4.6B. We note that the definition used by the Model JOA focuses on ‘harmful consequences’, which arguably may result in a narrower scope for these terms than the terms are interpreted at Australian common law.For example, this principle is reflected in the ‘purpose’ section of the Association of International Petroleum Negotiators (AIPN), Model Form International Accounting Procedure—2004. AIPN Model Contracts, 2004.
Victorian Workcover Authority v Esso Australia Ltd (2001) 207 CLR 520 at 528.
Refer to note 1 above.
In particular, see the statement by Lord Denman in Hinton v Dibbin (1842) 2 QB 646 where his Lordship stated that ‘… it may well be doubted whether between gross negligence and negligence merely, any intelligible distinction exists’.
Finklestein J in CMG Equity Investments Pty Ltd v Australia and New Zealand Banking Group Ltd (2008) 65 ACSR 650 at [28] citing Hudson v Vinety [1921] 1 Ch 98 at 104.
Red Sea Tankers Ltd v Papachristidis & Ors—The ‘Hellspont Ardent’ [1997] 2 L1 L R 547 per Mance J at 586. The interpretation of Mance J was subsequently endorsed and cited with approval by the Court of Appeal in Queensland in James Thane Pty Ltd v Conrad International Hotels Corp; Workers’ Compensation Board of Queensland v Conrad International Hotels Corp; and, Conrad International Hotels Corp v Jupiters Ltd [1999] QCA 516.
State of South Australia and Another v Marcus Clark (1996) 19 ACSR 606.
Ibid 7. For example, in Red Sea, it was held that inspection of full class records was an elementary and simple step that any competent adviser in a similar position ought to have undertaken, thus the failure to inspect amounted gross negligence.
Such conduct is most often caught by fraud.
Goodman v Harvey (1836) 4 A&E 870.
Armitage v Nurse [1997] 2 All ER 705.
Johnson J in Graham’s Case (1901) 2 IR 13 at 19 cited with approval by Kitto J in Transport Commission (Tas) v Neale Edwards Pty Ltd (19654) 92 CLR 214 at 228.
Lord Alverstone CJ in Forder v Great Western Railway Company [1905] 2 KB 532, 535 cited with approval by Kitto J in Transport Commission (Tas) v Neale Edwards Pty Ltd (1954) 92 CLR 214 at 228.
This view is supported by Royal Victorian Aero Club v The Commonwealth (1954) CLR 236 per Webb J.
Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, per Romer J at 434.
JG Santamaria QC, 2006—Common phrases in resources contracts. AMPLA Yearbook 2006, 216.
Red Sea Tankers Ltd v Papachristidis & Ors—The ‘Hellspont Ardent’ [1997] 2 L1 L R 547.
The English Court of Appeal has held that consequential loss is loss which falls within the second limb of the rule in Hadley v Baxendale (1854) 9 Exch 341 at 354, which entitles recovery of damages which may reasonably be supposed to have been in the contemplation of both parties at the time they entered into the contract. See Koufos v C Czarnikow Ltd [1969] 1 AC 350; British Suder plc v NEI Power Projects Ltd [1998] 87 BLR 42; Hotel Service Ltd v Hilton International Hotels (UK) Ltd [2000] 1 BLR 235; and, Waterford Electronics Ltd v Sanderson CFL Ltd [2001] 1 All ER (Comm) 696. In Australia, this approach has traditionally been followed, for example, see Frank Davies Pty Ltd v Container Haulage Group Pty Ltd (No 1) (1989) 98 FLR 289.
Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26. This view has also been adopted by the New South Wales Court of Appeal, see Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224. A good commentary is found in the article by P Holden, 2009—Commentary on contractual indemnities in the context of resources joint venture agreements. ARLJ 2009, 176.
For example, on the basis that the context was different, in MGC Properties Pty Ltd v Tang [2009] QSC 322, the Supreme Court of Queensland distinguished the position in Environmental Systems (refer to note 20 above) and reached a different conclusion.
Association of International Petroleum Negotiators (AIPN), Model International Operating Agreement: guidance notes for the drafting of an international operating agreement in the context of a civil law jurisdiction—2002 at 3. AIPN Model Contracts, 2002.
