INTERNATIONAL ARBITRATION 1/3LY
THE CONTRACTUAL ARRANGEMENTS On 30May 2012, Adamantine (as contractor) acquired an interest in the East Africa Rift System play by entering into a PSCwith the Government of Kenya. The PSC anticipated a six-year exploration phase divided into three periods. Each two-year period contained certainminimum spend (MS) andminimumwork obligations (MWO) for Adamantine. The Government was obliged to allow Adamantine tomove into the next exploration period if theMS andMWOwere completed. On 14 September 2012, Adamantine transferred a 50% participating interest in the PSC to Bowleven pursuant to a Sale and Purchase Agreement (SPA). In return, Bowlevenwas required to carry theMS for each exploration period. Bowleven subsequently farmed out a 30% participating interest in the PSC to First Oil. The SPA provided that no later than threemonths before the expiry of each exploration period (or any extension thereof) the parties would vote onwhether to continue with exploration or to relinquish the PSC. If both parties voted to drill, Adamantine would seek to activate the next exploration period in accordance with the PSC. If both parties voted to drop, theywould relinquish the PSC. However, if one party voted to drill and the other voted to drop (the relinquishing party), then the relinquishing partywould exit andwould be required to transfer its 50% participating interest to the other party for nil consideration. In accordance with industry standard practice, a Joint Operating Agreement (JOA) dated 12 October 2012 between Adamantine and Bowleven supplemented the SPA. THE DISPUTE Both Adamantine and Bowleven acknowledged that theywould not complete theMWO for the IEP (initial exploration period) by the deadline of 26May 2015. Work was already behind schedule when disaffected locals attacked awork camp in January 2015 and caused seismic work to stop. Adamantine had sought, but had not (yet) been granted an extension to the IEP by the Government. Nonetheless, Adamantine called for amanagement committeemeeting and a drill or drop vote on 25 February 2015 (i.e. threemonths before the expiry date of the IEP). Bowleven responded that the call for a vote was premature and invalid. Bowleven argued that since it was clear they would not complete theMWO by the IEP deadline, the right tomove into the 1AEP (first additional exploration period) did not exist. Regardless, Adamantine proceededwith the drill or drop vote and voted tomove into the 1AEP. During themanagement committeemeeting Bowleven voted “yes” to proceeding, conditional on receiving the extension to the IEP. Bowleven insisted at themeeting that a conditional vote was valid and should be recorded. Adamantine characterised Bowleven as having voted not tomove into the 1AEP (i.e. having voted to drop its participating interest). In a followup email, Bowleven said that, if required to vote, it voted no on the basis that the parties were unable tomove into the 1AEP. Bowleven also stated that, if the IEP expiry date was extended, its no vote should be considered invalid and there should be a further vote no later than threemonths before that extended expiry date. Adamantine subsequently instigated proceedings to establish that the vote was valid and that it was entitled to Bowleven’s participating interest in the PSC because Bowleven had voted to drop its interest.
THE DECISION The Court said that the commercial rationale for the voting timetable was to balance two competing needs: 1. each party’s need to have themaximumopportunity to assess the existing data before being required tomake the drill or drop decision; and 2. each party’s need to have sufficient time tomake the arrangements for the next exploration period should a party elect to continue with exploration (for example, securing necessary finance or farming out a participating interest). The parties had agreed that holding a drill or drop vote threemonths before the next exploration periodwas due to begin struck the right commercial balance between these needs. The Court held that the drill or drop vote called by Adamantine was not valid. The Court noted that if Adamantine’s call for a vote was valid, and Bowleven had voted yes, then if the Government extended the termof the IEP the parties would have been irrevocably committed tomoving into the 1AEP and there would not have been a vote threemonths prior to the expiry of the extended IEP. In effect, the parties would have taken their decisionwithout the benefit of the results of the data collected during the extension. In addition, this would have hinder the parties’ forward planning as the decision to continue explorationwould have been dependent on a variable outside their control, namely, the Government agreeing an extension under the PSC. This outcome was contrary to the commercial rationale for the agreed timetable for the drill or drop vote.
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