(a)Proceeding without a JSBA
A JOA could, in theory, be applied to govern the relationship between the parties in applying for the award of the concession but the JOA would need some modification from its standard form and would contain many provisions which simply would be redundant for the task of preparing a joint bid. Consequently, a bespoke JSBA is preferable but there is always the possibility that very early entry into a fully termed JOA might be used as a vehicle to govern the terms of a concession application rather than to place reliance on a JSBA. This could happen most obviously where the parties to the proposed joint bid already have an extensive history of working together, know the concession and the area to which it relates, and have a form of JOA that suits their purposes and which they would be happy to continue to apply to the concession if they were successful in their application. In these circumstances the required modifications to the JOA would be to the scope (see 6.1) in order to recite the joint bid provisions and to include a specific event of termination of the JOA if the application for the grant of the concession was unsuccessful.
The JOA might provide that the parties expressly ratify all of the actions of the appointed operator that were undertaken in the period prior to execution of the JOA, and additionally the JOA might award a measure of compensation to that operator retrospectively in order to cover the costs incurred by the operator in the negotiation of the concession and the preparation of the JOA. Such a provision is useful where there has been a hiatus between the grant of the concession and entry into the JOA.
Where there is a period of time between the decision of a group of parties to form a joint venture and the JOA for that joint venture becoming effective – such as where a party farms out a 100% interest to one or more incoming parties, and the effectiveness of the required JOA is suspended pending state approval of that farm-out and/or the terms of the JOA but, in the meantime, activities still have to take place that are necessary to further the petroleum project – then in the absence of the JOA, there will need to be a vehicle by which any costs that are necessarily incurred by the parties (not only the operator, but also the non-operating parties) in the furtherance of the intended joint operations can be disbursed between the parties, according to whatever cost-sharing basis is agreed between them.
Because the JOA is not yet effective, the associated accounting procedure (see 9.1) will not operate in order to allow such costs to be distributed between the parties. Consequently, some form of interim cost-sharing agreement could be entered into between the parties. This agreement will describe the nature of the costs incurred by a party that are to be shared, control the manner in which those costs are incurred (typically by reference to a requirement that such costs be pre-approved by all of the parties, up to a defined monetary value) and recite the manner in which the costs are to be shared between the parties.
A conventional accounting procedure would allow only the operator to recover the costs that it had incurred, and would not typically operate so as to allow a non-operating party to recharge to all of the parties the costs that it had incurred. Therefore, such an interim cost-sharing agreement would represent something of a departure from the conventional accounting principles of the JOA.
The remedy available to the other parties for the failure of a party to pay its share of the costs so incurred will also need to be considered. Because the JOA has yet to come into existence, the conventional forfeiture remedy (see 18.7) will not be capable of application (unless that default was to be carried forward into the effectiveness of the JOA and treated as an immediate default thereunder). However, a failure of a party to pay its share of the costs under such an interim cost-sharing agreement would still stand as a debt due and owing by the defaulting party, and would be subject to recovery in the customary manner. It could also lead to the loss of the right of the defaulting party to become party to the concession and the JOA – hardly an auspicious start to the relationship that the JOA seeks to create.
The interim cost-sharing agreement could be recited within the terms of a farm-out agreement (see Appendix 1) or could be a standalone arrangement.
(b)Pre-JSBA issues
Prior to the commencement of the negotiation of a JSBA, the parties should assess what they each offer to the consortium (and also what they expect each of the others to offer). These discussions invariably involve the disclosure of commercially sensitive information, thus necessitating the entry by the parties into a confidentiality agreement before the making of detailed disclosures. It may be that a certain party brings significantly more value to the consortium than the others if it is in sole possession of certain high value information. In order for that party to disclose such information to the consortium it may seek more comfort in respect of the maintenance of its confidentiality than is the norm in a standard confidentiality agreement (by, for example, greatly limiting the circumstances in which permitted disclosures can be made and applying indemnity, consequential loss liability and account of profit provisions for losses arising from a proven breach). The parties should therefore consider that there may be some debate in the negotiation of the confidentiality agreement, and the parties with less (or no) confidential information to share will accordingly be less concerned about the confidentiality aspects of their relationship.
Additionally, the parties should be aware that there could be area of mutual interest agreements (AMIAs) (see 1.6) already in existence which bind potential consortium members. The effect of these pre-existing arrangements on the composition of the intended consortium will need to be considered carefully.
(c)The content and effect of the JSBA
The ostensible sequence of events is that the JSBA acts as a precursor to the fully termed JOA in that it governs the relationship of the parties prior to the award of a concession, while the JOA governs the relationship of the parties after the award (assuming that the application is successful). It is common for the JSBA to set out the terms which will govern the behaviour of the consortium running up to the award of the concession. Agreeing those terms in the JSBA allows possible contentions between the consortium members to be identified early on and addressed before the concession is awarded. Investing time in settling the content of the JSBA helps avoid a fractious consortium and costly inefficiencies later if a JOA is subsequently required.
The content of a JSBA is always a product of the time available prior to the submission of the concession application. The JSBA is typically drafted with a premature finish line in mind – the concession award. Instead, the parties should agree in the JSBA sufficient detail such that it can be used to operate the joint venture between the consortium members until when the JOA is agreed and becomes effective. It is not uncommon that due to time pressures, while still negotiating the JSBA, a consortium could find itself at the point of making a concession application without the agreed JSBA in place. In this circumstance there is the risk that a party might not act in the spirit of what the parties are attempting to agree in the JSBA, for example, by focusing its resources on another potential application in the concession award round, or by not taking certain actions prior to an intended deadline. This will waste time and deflect attention from the matters in hand. In reality there is no substitute for agreeing the JSBA as soon as possible.
Although the JSBA appears to be a straightforward, short-term agreement,1 the importance of its content and purpose should not be underestimated. Several considerations will be key.
The JSBA is essentially a simple form of a joint venture agreement, the purpose of which is to govern the joint application of the parties for the grant of a concession (whether that concession is to be awarded as part of a regular concession award round or on an ad hoc basis). Consequently, the JSBA will identify items such as the parties, the particular concession (or concessions) which they plan to apply for, the proportions in which