DEFAULT BY JOINT VENTURERS By Alan Frank Mizen*joint venture where the question of default is particularly important. Usually there is a whole section in a jointventure agreement dealing

DEFAULT BY JOINT VENTURERS

By Alan Frank Mizen*

This paper is designed to be a 'background' paper for the topic'Default by Joint Venturers' discussed at the workshop session ofthe 1985AMPLA Conference.

The subject of default and breakdowns in joint ventures has .beencovered on numerous occasions by other paper writers. 1 This paper doesnot intend to deal with the ground already covered by those papers, butmerely wishes to consider some recent developments in this area,particularly with respect to the doctrines of relief against forfeiture andpenalties, and to see whether these recent developments give any guidanceto the use of standard forms of default clauses in joint ventureagreements.

Although the heading of the paper refers to 'Joint Ventures' andtherefore might suggest that there will be a full scale analysis ofthe conceptof 'Joint Venture', this is not the case. J.D. Merralls Q.C. admirably dealtwith this.2 This paper deals solely with default by joint venturers.

Default clauses appear in joint venture agreements for two mainreasons:(a) to provide a disincentive against default; and(b) to provide a method by which a joint venture can continue in the

event of default.Apart from the obligations of the operator and the obligations of

each joint venturer to pay cash calls issued by the operator, both ofwhichwill be considered later in this paper, other obligations within a jointventure agreement capable of breach are:(a) the obligation of each joint venturer to appoint a representative to

an Operating Committee;

* B. Juris (Hons.) LL.B.(W.A.) Solicitor W.A.1 Williams H.P. 'Matters to be taken into consideration in the Negotiations of Farm-outs

and Operating Agreements' (1978) 1A.M.P.L.J. 509, 517, Coyle M. Sharwood M. PoultonT. and Roberts M.G. Panel Discussion on 'Deadlock Breaking Mechanisms in Miningand Petroleum Joint Ventures' (1980) 2 (2) A.M.P.L.J. 334, Merralls J.D. Q.C. 'JointVenture Agreements - Examination of the Basic Legal Concepts' (1981) 3 A.M.P.L.J. 1MacDonald K.D. 'Joint Ventures: Breakdowns and Repairs, Rights Upon Default' [1983]AMPLA Yearbook 209, Pliner R. and Coyle M. 'The O'Dea/Allstates Case and theImplications for Exploration and Mining Joint Venture Agreements' 2 AMPLA Bulletin37, Forsyth M. 'Partition of Petroleum Titles as a Remedy for Resolving Deadlocks inPetroleum Joint Ventures' [1984] AMPLA Yearbook 224, Reynolds R.M.B. 'JointVentures: Breakdowns and Repairs, Defaults and Securities' [1983] AMPLA Yearbook224, Chambers R. 'Methods of Structuring a Joint Venture to deal with a Co-Venturer'sFailure to Contribute to Expenditure' [1983] AMPLA Yearbook 235, Binks C.C.A.'Receivers, Liquidators and Partition' [1983] AMPLA Yearbook 258.

2 Merralls J.D. Q.C. 'Joint Venture Agreements - Examination of the Basic LegalConcepts' (1981) 3 A.M.P.L.J. 1 see also: Ryan Gerald LJ. 'Mining Jount VentureAgreements' (1982) 4 (1) A.M.P.L.J. 101, Sharwood M. 'Panel Discussion on DeadlockBreaking Mechanisms in Mining and Petroleum Joint Ventures' (1980) 2 (2) A.M.P.L.J.342,344.

92 1985 AMPLA Yearbook

(b) the obligation ofeachjoint venturer to be just and faithful and not todo anything that could place the assets of the joint venture injeopardy;

(c) the obligation ofeach joint venturer to keep information ofthe jointventure confidential;

(d) the obligation in most cases for each joint venturer to negotiate ingood faith a Development and Production Agreement in the eventof a commercial discovery of petroleum;

(e) the obligation ofeach joint venturer to pay its share ofroyalties etc.on any petroleum produced;

(f) the obligation ofeachjoint venturer to observe the provisions ofthejoint venture agreement when dealing with withdrawal andassignment;

(g) the obligation of each joint venturer not to mortgage, pledge orassign by way of security its interest in the joint venture; and

(h) the obligation in some cases for each joint venturer to maintain aminimum interest in the joint venture.These 'other obligations' which for the purpose ofthis paper will be

called 'secondary obligations' are rarely, ifever, the subject ofthe standardform of default clause which commonly appears in joint ventureagreements. 3 There is no good reason why a joint venture agreementshould spell out the consequences ofbreaches ofall secondary obligations.These are for the most part adequately left to the remedies available at lawand in equity. The standard default clause usually hits at the obligation ofjoint venturers to pay. It is the obligation to pay one's share that is fundamental in ajoint venture agreement, and it is the possible consequences ofa breach of that obligation, that is uppermost in the minds of jointventurers and their advisors when they are about to enter into anagreement. ,.

The obligations and duties of the operator is another area within ajoint venture where the question of default is particularly important.Usually there is a whole section in a joint venture agreement dealing withthe duties of the operator and the consequences that follow if those dutiesare either not performed, or not performed to the required standard. Thedefault of the operator in performing its duties as operator will not beconsidered in this paper. The role ofthe operator was fully examined in thepaper given by Kevin McCann.4

This paper will therefore concentrate on the breach ofthe obligationofa joint venturer to pay its share. The ramification of such a default willlargely depend upon the stage at which a joint venture is at in its

3 'Secondary obligations' are ofthe nature ofbeing obliged to appoint a representative to anoperating committee or to attend operating committee meetings are usually handled onthe basis that the defaulting party is deemed to accept decisions of the operatingcommittee. The operating committee being a decision making process binding upon thejoint venturers. For an examination of fiduciary obligations ofjoint ventureres see FinnP.D. 'Fiduciary Obligations of Operators and Co-Venturers in Natural Resources JointVentures'. [1984] AMPLA Yearbook 160.

4 McCann H.K. 'The Role of the Operator under a Joint Venture Agreement' (1982) 4 (2)A.M.P.L.J. 256.

Default by Joint Venturers 93

programme, and whether this is an exploration programme or a development programme. At this point it should be made clear that in the writer'sopinion there should be separate joint venture agreements for anexploration joint venture on the one hand, and a production anddevelopment joint venture on the other. Default clauses in each agreementwill be different. It is likely that the default clause in an exploration jointventure will be more onerous than the default clause in a production anddevelopment joint venture. In an exploration joint venture the concept offorfeiture will be heavily relied upon, whereas in a production anddevelopment joint venture, the concept ofliens on production will be moreheavily relied upon with forfeiture of interest being very much a lastretort. 5 The higher the risk the greater the severity of the default clause.

THE APEA DEFAULT CLAUSE

The Australian Petroleum Exploration Association Limited(APEA) has introduced guidelines for an exploration joint operatingagreement (JOA),6 and included in the guidelines is a proposed operatingagreement which contains a default clause that is used widely within thepetroleum industry in Australia. The clause is headed 'Costs, Expenses andDefault' and reads:

9.1 Except as otherwise expressly provided by this Agreement, each Party shall pay, inaccordance with the Accounting Procedure, a share ofthe costs and expenses incurredby the Operator pursuant to this Agreement proportionate to its Participating Interestfrom time to time.

9.2 The Operator may call for cash advances from the Parties in accQrdance with theAccounting Procedure.

9.3 All costs, expenses, credits, payments, disbursements, related matters and the methodof handling the accounting with respect thereto, shall be in accordance with theprovisions of the Accounting Procedure. In the event of any conflict between theprovisions of this Agreement and the provisions of the Accounting Procedure, theprovisions of the body of this Agreement shall, to the extent of the inconsistency,prevail.

9.4 If a Party hereto fails to make any payment provided for in this Agreement or theAccounting Procedure within the specified time, such Party shall be in default and allunpaid amounts shall bear interest computed from the due date until the actual date ofpayment at:(a) a rate being percent ( 0/0) greater than the interest rate published from

month to month in the Reserve Bank ofAustralia Statistical Bulletin as being themaximum rate at which Australian trading banks are permitted to lend onoverdrawn accounts with a limit not in excess ofONE HUNDRED THOUSANDDOLLARS ($100,000); or

(b) the highest interest rate permitted (otherwise than for registered money lenders)under the laws of the State or Territory in, or adjacent to which, the Permit islocated, whichever is less.

Interest shall be computed as aforesaid by applying th~.12revious month's rate for thenext succeeding month. All interest charges unpaid at -the end ofeach month shall beadded to the principal-and shall bearinterest until paid. The Operator shall have theright to bring suit to enforce the collection of any such indebtedness.Ifany Party is in default in making any payment provided for in this Agreement or the

5 The writer wishes to point out that this paper is largely based on explorationjoint venturesin the Petroleum industry. The basis for default clauses in production joint ventures isdifferent from that in an exploration joint venture.

6 APEA - Guidelines for an Exploration Joint Operating Agreement - 1984 Edition.


Accounting Procedure,__<-> days after the date ofnotice from the Operator tothe defaulting Party that the Operator considers such Party to be in default hereunder,such defaulting Party shall not, from that day, be entitled to vote at any OperatingCommittee Meeting or to vote upon a proposal in accordance with Clause 5.12. Whilea Party is in default, the Parties not in default each shall have a vote in the proportionwhich its individual Participating Interest bears to the combined ParticipatingInterests of all Parties not in default. Should a Party be reinstated by legal action,payment ofdebt or otherwise, its vote likewise shall be reinstated, but no vote taken ormatter 'decided without its vote during the interim shall be invalid for want of itsvote.

9.6 Ifany Party is in default in making any payment provided for in this Agreement or theAccounting Procedure and such default continues unremedied for __"_ <-> daysafter the date of notice from the Operator to the defaulting Party that the Operatorconsiders such Party to be in default hereunder (copies ofwhich notice shall be sent toall non-defaulting Parties), the Operator shall so notify the other Parties, including inthe notice the amount in default or arrears. Within __ <-> days followingdespatch of such notices, each of the other Parties shall pay the Operator such otherParty's share of the amount in default or arrears, in the proportion that such otherParty's Participating Interest bears to the Participating Interests of all such otherParties; and thereupon each such other Party shall be subrogated to that extent to theOperator's rights ofcollection as herein provided against the defaulting Party. Failureofany other such Party to pay its share of the amount in default as herein provided,shall itself constitute a default by the Party so failing and the provisions of thisAgreement shall apply to such further default.

9.7 A Party which remains in default as to any payment for a period of__<-> daysafter the date ofthe notice from the Operator to the defaulting Party that such Party isconsidered by the Operator to be in default shall thereby forfeit to those nondefaulting Parties (in the ratio of their respective Participating Interests one to theother) which have paid such Party's share, all right, title and interest ofthe defaultingParty in and to the Permit, by the Participant-Owned Assets and this Agreement. Suchdefaulting Party shall execute promptly such instruments of transfer and take suchother action and steps as may be necessary or appropriate, or required by thenon-defaulting Parties, to evidence the non-defaulting Parties' ownership in the ratioaforesaid of the rights of the defaulting Party so forfeited, and such non-defaultingParties may enforce specific performance thereof in any Court of competentjurisdiction. A defaulting Party shall pay to the Parties entitled thereto hereunder:(a) the amounts so due and owing by it;(b) all expenses and loss incurred by the non-defaulting Parties by reason of such

default and the actions taken thereafter with respect thereto, including all Courtcosts and legal fees (which expression shall include party and party costs andsolicitor and client costs); and

(c) in addition to amounts specified in paragraph (a), all amounts for which it wouldhave become liable but for forfeiture as aforesaid under operating programmesand budgets previously approved.

9.8 Each Party hereby irrevocably grants to the Operator a Power ofAttorney exercisableafter expiry of the period referred to in Clause 9.7, on the following terms:(a) The defaulting Party irrevocably appoints the Operator to be its Attorney and in its

name and on its behalfto carry out, to execute, to sign, to seal and to deliver and todo all assurances, deeds, instruments, acts and things whatsoever which in theopinion ofthe non-defaulting Parties are necessary or expedient for the defaultingParty to carry out, execute, sign, seal, deliver or do for the purpose ofenabling thenon-defaulting Parties to carry on the objects of this Agreement and to give effectto the intent ofClause 9.7. The defaulting Party hereby declares that this Power ofAttorney expressly covers all acts necessary to effect any assignment, transfer orremoval of the name of a defaulting Party from the Permit; and

(b) Any act or thing done by the Operator on behalf of the defaulting Party inpursuance of the powers conferred by paragraph (a) of this Clause shall bind thedefaulting Party absolutely. The defaulting Party shall, at all times, indemnify andhold harmless the Operator and the other Parties, their directors, officers,employees and representatives from and against any and all claims, damages and


liabilities arising out of any act or thing done, any obligation or responsibilityassumed, by the Operator or such other Parties on behalf of the defaultingParty.

9.9 The Parties agree that the rights conferred by this Article do not constitute a penaltyand are necessary to ensure maintenance of the Permit in good standing. Thedefaulting Party acknowledges that:(a) the assumption by the non-defaulting Parties ofthe liability ofthe defaulting Party

to the Relevant Authority to observe and perform all of the conditions to whichthe Permit is subject, and which thereafter are to be observed and performed;and

(b) the assumption pro rata by each ofthe non-defaulting Parties ofthe liability ofthedefaulting Party to the remainder of the non-defaulting Parties to observe andperform the obligations of the defaulting Party in terms of this Agreement, andwhich thereafter are to be observed and performed,

are good and valuable consideration for the exercise by the other Parties oftheir rightto take over and assume the whole ofthe Participating Interest ofthe defaulting Partyupon forfeiture in accordance with Clause 9.6.

This default clause achieves the following:(a) It allows a venture to continue by giving the operator the right to call

the non-defaulting parties to pay the defaulting party's share.(b) It is a disincentive against default in that:

(i) interest accrues at a high rate on the amount of thedefault;

(ii) after a defaulter has been in default for a period of time, thedefaulting party's interest is transferred to the nondefaulters; and

(iii) the defaulting party loses its right to vote at any operatingcommittee meeting.

(c) To ensure there is a transfer ofthe defaulting party's interest a powerof attorney is created in favour of the operator.7

The APEA default clause is a straightforward way ofdealing with ajoint venturer which fails to pay its way. The substance of this clause isclear; ifa party is in default that party will lose its interest and will be liableto pay, inter alia, amounts for which it would have become liable but forthe forfeiture.

With the exception of clause 9.9, there is no attempt at trying todisguise the forfeiture as a deemed withdrawal and thus trying to getaround the notion ofpenalty by trying to set up that a party lost its interestnot because of a breach of the agreement, but because it elected not toperform. The importance of this distinction is made clear in the case ofO'Dea and Others v. Allstates Leasing System (WA) Pty. Ltd. and Others,8

which is considered in detail later in this paper.Gibbs C.l. held that the facts ofthe case made it clear that the event

that brought about the outstanding balance becoming payable was a breachof the contract, and it was therefore necessary to examine the distinctionbetween penalties and liquidated damages. All judges in that case stressedthat it is the substance of the contract that must be considered in order to

7 It should be noted that in the writer's experience it is rare for junior explorers to agree to adefault clause with the existence ofa power ofattorney in favour ofthe operator or anyoneelse.

8 (1983) 57 A.LJ.R. 172.


determine whether the event that triggers the damages clause is a breach ofcontract.

This distinction is important because there are many forms which adefault clause can take. Merralls mentioned six.9 Pliner and Coyle lO dealingwith O'Dea's case mention dilution, forfeiture, withdrawal, sole risk andbuy back as being alternative methods ofhandling default and breakdown.This paper will not describe each ofthese. They are well known and in anyevent are covered in the papers to which reference has just been made. Thepoint to make is that non-contributions that trigger forfeiture and deemedwithdrawal are likely to be considered as breaches, whereasnon-contributions that trigger sole risk and buy back (non consent), areunlikely to be considered as breaches. If an event, for example thenon-payment of calls for money, is considered not to be a breach, then itwill not be necessary to examine the distinction between penalties andliquidated damages. On the other hand if the event is considered to be abreach then it will be necessary to examine this distinction. Clause 9.9 ofthe APEA default clause envisages an examination of the distinction, as itshould, by attempting to justify the forfeitures referred to in clause 9.6.

THE DOCTRINES OF RELIEF AGAINST FORFEITURE ANDUNENFORCEABLE PENALTIES

Prior to discussing these equitable doctrines it is useful to considersome comments made by Mr. Justice Kennedy in the case of MonarchPetroleum N.L. v. Citco Australia Petroleum Ltd. and Others. 11 Hiscomments deal specifically with default clauses. The clause with whichKennedy J. was dealing is set out below:

8.3 Any Party failing to pay its share of costs and expenses in the manner provided inparagraph 8.1 or failing to advance its share ofestimated expenditures in the mannerprovided in paragraph 8.2 shall be in default hereunder. Operator shall give adefaulting party notice in writing ofsuch default in the manner provided in Article 16,and, if such party shall fail to tender funds sufficient to cover such default withinfifteen (15) days following receipt ofsuch notice, Operator shall promptly give noticethereof to the non-defaulting parties in the same manner in which event saidnon-defaulting parties shall within ten (10) days after receipt thereof remit toOperator's designated account, in the proportion that the Percentage Interest ofeachbears to the surn of their Percentage Interests, funds equal to the amount in default.The non-defaulting parties shall then have a lien on all ofthe defaulting party's interestin the Contract including its rights to all Available Oil and Available Gas and shall beentitled to enforce payment of the sums remitted to cover such default together withinterest thereon at the annual prime borrowing rate quoted by the Bank ofNew SouthWales plus 2% from the date of default. Such interest shall inure to the commonaccount of the non-defaulting Parties.

9 Merralls J.D. op. cit. 13.(a) loss of interest 'forfeiture';(b) abatement of interest 'withering or dilution';(c) loss of suspension of rights to take product;(d) payment by non-defaulting participants under the security of cross charges;(e) expropriation by purchase by other other participants;(f) liability to pay interest or a premium.

10 Pliner and Coyle op. cit. n.l.11 Unreported 29/5/1985. No. 2545 of 1983 (S. C. W.A.) Kennedy 1.


8.4 If a default persists for longer than Sixty (60) days after receipt of notice by thedefaulting Party of default hereinabove provided, in addition to other remediesprovided herein and such other remedies as may be available under law, the defaultingParty shall have no rights to Available Oil and Available Gas and non-defaultingParties shall have the right to require the defaulting Party to assign to them atdefaulting Party's expense defaulting Party's entire Percentage Interest in the Contractwhereupon, as from the date of default, the defaulting party shall cease to be a partyhereto and shall have no rights nor benefits nor obligations (except as set forth below inthis paragraph 8.4), in or under this Agreement and the Contract. Non-defaultingparties shall take the assignment in the proportion that the Percentage Interest ofeachbears to the sum of the Percentage Interests ofall the non-defaulting Parties prior tosuch assignment. The defaulting Party shall perform, and shall assist thenon-defaulting Parties to perform, any and all acts required to be done by applicablelaw or regulation in order to render such assignment legally valid and recognised assuch by the Government and shall execute such instruments and take such otheractions, induding the payment by it of such fines or penalties as may be imposed byapplicable law or contract, as may be necessary in order to effect prompt and validassignment ofits Percentage Interest to the non-defaulting Parties free ofall liens andencumbrances. Notwithstanding the assignment by a defaulting Party of itsPercentage Interest as herein provided, such Party shall remain liable for itsPercentage Interest share at the time ofdefault of all costs and expenses incurred byOperator up to the date on which such assignment became effective hereunder plusinterest as provided in paragraph 8.3 and all costs and expenses incurred by Operatorplus interest as provided in paragraph 8.3 in execution of a program theretoforeapproved by the Operating Committee. Such defaulting Party shall also remain liablefor its share ofany penalties which may be at any time imposed on the non-defaultingParties for failure to comply with any drilling or investment obligations required bythe terms of the Contract or by the Government to the extent that such failure isattributable to such default. Until the assignment of the defaulting Party's PercentageInterest shall be effective and be recognised by the Government under applicable law,the defaulting Party shall remain obligated to join in all notices to be given under thisAgreement to the Government and to third parties and to join in all applications forthe maintenance of rights and privileges under the Contract to the extent that itsjoinder may be necessary or appropriate to the purposes of any such notices orapplications, but such Party shall not have any interest in or share ofany Available Oilor Available Gas or any asset.

Kennedy J. said:

It is useful at this stage to comment shortly upon the prOVISIons permIttIng thenon-defaulting parties to require an assignment of a defaulting party's interest. Oilexploration is an extremely high risk operation, accompanied by high costs. The area towhich the permit related was an exceedingly high risk area. Offshore drilling, due primarilyto weather and drilling conditions, carries with it particular risks. The cost ofdrilling anoffshore well can vary in a normal case from $5,000,000 to $15,000,000; but the cost canblowout, ... The tendency is to share the risks by having a number ofparticipants in eachpermit. As one witness expressed it, it is better to have 10% often wells than 100% ofonewell. High risk capital is scarce.

In these circumstances, participants in oil exploration ventures cannot contemplateanything other than a commercial operation which flows smoothly and is not liable todisruption, for example, by the default ofany participant. A steadyflow offunds is essential.Commitments must be made a long time ahead and it is important that programmes beadhered to. Any default by one participant places a heavy burden upon the otherparticipants. Participants normally have a budget for the year, which covers all theiroperations, and to find additional funds part of the way through the year can placeconsiderable strains upon them, sometimes necessitating cut backs in other areas or evennecessitating a complete withdrawal, with a consequent loss of the permit.

There is a need perceived within the industry to be able rapidly to forfeit a defaultingparty's interest, and provisions similar to those in the Operating Agreement (in question)are common place, if not standard. Indeed, the present tendency is to shorten periods of


default for this purpose. The acquisition of a defaulter's interest is not seen as beingbeneficial in the exploration stage ofa venture. On the contrary, it involves an additionalfinancial commitment without necessarily any return on it. If there is eventually anyreturn, it will frequently only be revealed after the expenditure of further funds to whichthe defaulting party should have contributed, but to which it did not contribute. 12

(Emphasis added).

There are at least six points that can be made. Kennedy J. sees that ajoint venture for petroleum exploration:(a) is high risk;(b) is expensive;(c) is a commercial operation;(d) requires a steady flow of funds;(e) requires participants that pay their way and that a default places a

heavy burden on other participants; and(f) requires (as perceived within the petroleum industry) the need to be

able to rapidly forfeit a defaulting party's interest.These points sho:uld be kept in mind during thefollowing discussion

on forfeiture and penalties.The doctrines of relief against forfeiture and unenforceable

penalties have recently been considered by the High Court in Legione v.Hateley, 13 Ciavarella v. BaimerI4 and O'Dea's case with Legione v. Hateleyand Ciavarella v. Balmer dealing primarily with relief against forfeitureand O'Dea's case dealing primarily with penalties. I5 These cases to someextent have assisted in recognizing the distinction between the twodoctrines, for until these decisions, there was some confusion in applyingand distinguishing them. This distinction was discussed in Legione v.Hateley. Mason and Dean JJ. stated:

A penalty, as its name suggests, is in the nature ofa punishment for non-observance ofacontractual stipulation; it consists of the imposition ofan additional or different liabilityupon breach ofthe contractual stipulation (see generally O'Dea v. Allstates Leasing System(WA) Pty. Ltd.). On the other hand, forfeiture involves the loss or determination of an,estate or interest in property or a proprietary right for example a lease in consequence ofafailure to perform a covenant. 16

It is essential to recognize that the jurisdictions to relieve againstforfeiture and against penalties are distinct. Default clauses tend to workforfeiture in one way or another. Ifa party does not pay its share ofthe costsofa joint venture within a specified period of time, its interest in the jointventure will be either forfeited, assigned, reduced, or deemed to have beensurrendered.

In addition its contributions already made to the joint venture willbe lost forever. The combined forfeiture of an interest in a joint ventureand contributions made, may constitute an unenforceable penalty, but it isnot a prerequisite to invoking the equitable jurisdiction for relief against

12 per Kennedy J. 11.13 (1983) 57 A.L.J.R. 292.14 (1983) 57 A.L.J.R. 632.15 Alth?ugh Brennan J., in O'Dea's case, considered it from'the standpoint of relief against

forfeIture rather than enforcement of a penalty. He reaffirmed the principle that equitymay make such order as is necessary to relieve against the exaction of a forfeiture.

16 Ope cit. n.13, 307


forfeiture that a clause be penal. 17 This paper will now deal separately withreliefagainst forfeiture and the case ofLegione v. Hateley on the one hand,and unenforceable penalties and O'Dea's case on the other.

Relief Against Forfeiture - Legione v. Hateley

The modem approach to relief against forfeiture has developedconsiderably since the expressions ofopinions by members ofthe House ofLords in Shiloh Spinners Limited v. Harding. 18 Until that case there hadbeen inconsistent approaches to the doctrine. This case concernedforfeiture for breach of covenants in a lease. The lease contained acovenant that if the tenant failed to perform or observe a covenant, thelandlord had the right to re-enter and retake the premises. The plaintiffsrelying on their right to re-enter, sued the defendant for possession of thepremises, alleging failure to perform and observe a condition of theagreement.

Lord Wilberforce said,It remains true today that equity expects men to carry out their bargains and will not letthem buy their way out by uncovenanted payment. But it is consistent with theseprinciples that we should re-affirm the right ofcourts ofequity in appropriate and limitedcases, to relieve against forfeiture for breach ofcovenant or condition, where the primaryobject of the bargain is to secure a stated result which can effectively be attained when thematter comes before the court, and where the forfeiture provision is added by way ofsecurity for the production ofthat result. The word 'appropriate' involves consideration ofthe conduct of the applicant for relief, in particular whether his default was wilful, of thegravity of the breaches, and of the disparity between the value of the property of whichforfeiture is claimed as compared with the damage caused by the breach.

and ...Established and, in my opinion, sound principle requires that wilful breaches should not,or at least should only in exceptional cases, be relieved against, ifonly for the reason thatthe Assignor should not be compelled to remain in relation of neighbourhood with aperson in deliberate breach of his obligations. 19

Lord Simon of Glaisdale was prepared to extend the doctrine offorfeiture when he said;

I would therefore myself hold that equity has an unlimited and unfettered jurisdiction torelieve against contractual forfeitures and penalties. What have sometimes been regardedas fetters to the jurisdiction are, in my view, more properly to be seen as considerationswhich the Court will weigh in deciding how to exercise an unfettered jurisdiction.20

Lord Simon made similar statements in the case ofMardorfPeachand Co. Limited v. Attica Sea Carriers Corporation ofLiberia.21 Howeverin Scandinavian Trading Tanker Co. AB v. Flota Petrolera Ecuatoriana,22Lord Simon's comments were not approved. Lord Diplock cited withapproval the statements ofRobert GoffL.J. made in the Court ofAppeal ofthat case. Robert Goff L.J. said:

17 Gibbs C.J. and Murphy J. Legione v. Hateley supra n.13, 299.18 [1973] A.C. 691.19 Ope cit. 723, 725.20 Ope cit. 726.21 [1977] A.C. 850.22 [1983] 2 ALL E.R. 763.


Parties to such contract should be capable of looking after themselves; at the very least,they are capable of taking advice, and the services of brokers are available, and arefrequently used, when negotiating terms. The possibility that ship owners may snatch atthe opportunity to withdraw ships from the service of time charters for non-payment ofhire must be very well known in the world ofshipping; it must also be very well known thatanti-technicality clauses are available which are effective to prevent any such occurrence.Ifa prospective time charter wishes to have any such clause included in the charter, he canbargain for it; if he finds it necessary or desirable to agree to a charter which contains nosuch clause he can warn the relevant section ofhis office, and his bank, ofthe importance ofsecuring timeous payment. But the matter does not stop there. It is of the utmostimportance in commercial transactions that, ifany particular event occurs which may effectthe party's respective rights under a commercial contract, they should know where theystand. The courts should so far as possible desist from placing obstacles in the way ofeitherparty ascertaining his legal position, if necessary with the aid of advice from a qualifiedlawyer, because it may be commercially desirable for action to be taken without delay,action which may be irrevocable and which may have far reaching consequences.

It is for this reason, ofcourse, that the English courts have time and again asserted the needfor certainty in commercial transaction, for the simple reason that the parties to suchtransactions are entitled to know where they stand and to act accordingly. In particular,when a ship owner becomes entitled under the terms of his contract, to withdraw a shipfrom the service ofa time charter, he may well wish to act swiftly and irrevocably. True, hisproblem may, in any particular case, prove to be capable of solution by entering into awithout prejudice agreement with the original time charter, under which the rate of hirepayable in future will be made to depend on a decision, by arbitrators or by a court,whether he was in law entitled to determine the charter. But this is not always possible. Hemay wish to refix his ship elsewhere as soon as possible, to take advantage ofa favourablemarket. It is no answer to this difficulty that the ship may have cargo aboard at the time, sothat her services cannot immediately be made available to another charterer; for one thingthe ship may not have cargo on board, and for another she can be refixed immediatelyunder a charter to commence at the end of her laden voyage. Nor is it an answer that theparties can immediately apply to arbitrators, or to a court, for a decision, and that bothmaritime arbitrators and the Commercial Court in this country are prepared to act veryquickly and at very short notice. For quite apart from the fact that some delay is inherent inany legal process, if the question to be decided is whether the tribunal is to grant equitablerelief, investigation of the relevant circumstances, and the collection ofevidence for thatpurpose, cannot ordinarily be carried out in a very short period of time. 23 (Emphasisadded).

It should be pointed out that the cases of Mardorf Peach andScandinavian Trading Tanker Company, both involved an examination ofa time charter contract concerning the right ofa shipowner on time charterto withdraw its vessel from the charter for non payment of hire, thecontract expressly allowing the owner to do this. In those cases it was heldthat the concept of equitable relief from forfeiture was inappropriate tosuch contracts. It was said that a time charter, unless it is a charter bydemise, transfers to the charterer no interest in or right to possession ofthevessel in question: it is primarily a contract for services. Being a contractfor services it is therefore one where courts do not grant specificperformance and it was suggested by Lord Diplock that ifan injunction begranted restraining the shipowner from exercising its right of withdrawal,that this would in effect be pregnant with an affirmative order to theshipowner to perform the contract; in essence a decree for specificperformance. Equity should not therefore intervene.

23 Scandinavian Trading Tanker Co. AB v. Flota Petrolera Ecuatoriana [1983] 1 All E.R.301, 308-309.


Lord Diplock, after warning against the application of LordWilberforce's remarks in Shiloh Spinners Limited v. Harding to contractswhich did not involve any transfer ofproprietary or possessory rights, saidthat it was not possible to say that the object of the insertion of awithdrawal clause in a time'charter was 'essentially to secure the paymentof money'. 'Hire is payable in advance in order to provide a fund fromwhich the ship owner can meet those expenses of rendering the promisedservices to the charter he has undertaken to bear himselfunder the charterparty.'24

The following points can be made with respect to the casesconsi~ered thus far under this heading:(a) equity expects men to carry out their bargains especially in relation

to commercial transactions of the type mentioned by Robert GoffL.J.

(b) courts ofequity may in appropriate and limited cases relieve againsta forfeiture provided in a contract, but not in contracts forservices;

(c) whether it is appropriate to do so, involves a consideration of theconduct of the applicant seeking relief, and the disparity betweenwhat is lost as a result ofthe forfeiture and the damage caused by thebreach;

(d) to be able to have any hope of obtaining an order for relief againstforfeiture there needs to be a loss ofsome proprietary or possessoryright;

(e) wilful breaches should not, or at least only in exceptional cases, berelieved against.To the writer's knowledge, cases involving relief against forfeiture

have concerned leases, mortgages, time charter agreements and contractsfor the sale ofland. With the exception ofSouthern Cross Exploration N.L.v. Bennett and Others25 which will be dealt with later in this paper, theforfeiture ofa party's interest in a petroleum permit or a mining tenementfor default under a joint venture agreement has not been considered bycourts in Australia or in England. The comments ofMr. Justice Kennedy inthe Monarch case, give some guidance as to what judicial opinion ofdefault clauses is likely to be. His comments can only be encouraging.

It is convenient at this point to consider the nature of a party'sinterest held in a joint venture. Each participant usually has a directinterest in the relevant petroleum permit or mining tenement. Other assetssuch as equipment are usually held in the Operator's name for the benefitof the joint venture. Information acquired during the life of the jointventure will belong to the participant. However there can be no doubt, asForsyth26 points out, that the major asset of a joint venture, whether it beduring the exploration phase or the production phase, is the title. Priorconsideration has already been given to the legal nature of an exploration

24 These words regarding the creation of a 'fund' are similar to the words of Kennedy J. inMonarch's case supra n.ll.

25 Unreported 9/8/1983 Full Court S.C. N.S.W.26 Forsyth M. 'Partition of Petroleum Titles as a Remedy for Resolving Deadlocks in

Petroleum Joint Ventures' [1984] AMPLA Yearbook 224,233.


and production title27 and therefore will not be discussed again, suffice tosay that it is the submission ofthis paper that an interest in ajoint ventureagreement is of the type that creates the possessory and proprietary rightsreferred to above.

The object ofany mining or petroleum joint venture is to obtain adiscovery. Parties will be required to contribute funds as operatingexpenses in the hope ofobtaining that discovery, and ofcourse in keepingthe title in good standing.

A feature ofajoint venture agreement is to ensure that interests areheld only by parties that will promptly defray their share of explorationexpenditure duly approved and incurred. It could be argued therefore thata default clause providing for forfeiture is necessary to enablenon-defaulting parties to continue the enterprise upon which they allembarked.

The recent Australian case of Legione v. Hateley will now beconsidered. In that case three written judgments were given. The first wasgiven by Gibbs C.J. and Murphy J., the second by Mason and Deane JJ.and the third by Brennan J.

The facts of the case were that a husband and wife purchased landfor $35,000.00 on 14 July 1978, paying a deposit of$6,000.00. The contractgave them the right to go into possession on acceptance of title and madethe balance ofth~ purchase money payable not later than 1 July 1979. Itmade time of the essence of the contract, but made general provision forthe enforcement ofrights under it only after written notice ofnot less thanfourteen days. It further provided that if such a notice also stated that thecontract would be rescinded on default in compliance with it, then thecontract should become rescinded upon expiry of the period of the notice.The purchasers went into possession ofthe land and erected a house on it.They were unable to pay the balance ofthe purchase money on 1July 1979,and on 26 July 1979 the vendors gave fifteen days' notice under thecontract of their intention to exercise their rights upon default, and thatunless the default was remedied the contract would be rescinded inaccordance with its terms. Several days before expiry of the notice on 10August 1979 the purchasers' solicitor asked by telephone to speak to thepersons dealing with the matter in the office of the vendors' solicitors. Hewas put on to W., an employee of the firm who was stated to be thesecretary ofa partner and who had signed in her own name on behalfofthevendors' solicitors letters sent to the purchasers' solicitors. He told he~ thatthey would have the money available for settlement ofthe purchase on 17August 1979. W. replied, 'I think that'll be all right but I'll have to getinstructions'. On 14 August 1979 the vendors' solicitors advised that theirclients would not transfer the land as the contract had become rescinded on11 August.

The purchasers sued in the Supreme Court of Victoria for specificperformance of the contract, but the trial judge refused the claim. An

27 Lang A.G. and Crommelin M. Australian Mining and Petroleum Laws (1979) 246 reexploration titles, 261 re production titles. Wallace E.W. 'Stamp Duty Aspects ofMiningInteres~s and Transactions' [1984] AMPLA Yearbook 424, Forsyth Ope cit. n.26.


appeal to the Full Court of the Supreme Court was allowed. The vendorsappealed from the decision of the Full Court.

Gibbs C.l. and Murphy l.

Counsel for the vendors advanced three reasons why the court couldnot grant relief against forfeiture to the purchasers. The reasons were:(a) equity will not relieve against a contract ofsale where the interest is

lost, consequent upon a discharge of the contract;(b) the power to grant reliefagainst forfeiture is not exercised except to

grant relief against a penal provision in a contract; and(c) equity does not intervene to grant specific performance (whether to

effect relief against forfeiture or otherwise), where the parties havestipulated in their bargain that time shall be of the essence, and theparty seeking specific performance is in default.With respect to the second ground Gibbs C.J. and Murphy J. stated

that from early times, courts ofequity have granted reliefagainst forfeitureof leases where the breach was by non payment of rent and where nopenalty existed. They concluded, as has already been stated, that it isunnecessary for a clause to be penal before relief against forfeiture can beinvoked.

With respect to the first and third ground Gibbs C.J. and Murphy J.concluded, after examining the conflicting cases of Vernon v. Stephens,28 Inre Dagenham (Thames) Dock Co; Ex parte Hulse29 and Kilmer v. BritishColumbia Orchard Lands Ltd. 30 on the one hand and of Steedman v.Drinkle3! and Brickles v. Snelf32 on the other:

A court of equity will grant specific performance notwithstanding a failure to make apayment within the time specified by the contract if there is nothing to render such anorder inequitable. The fact that time for the performance ofstipulated obligation is of theessence of the contract generally makes the grant of specific performance inequitable insuch a case. However, ifit isjust to relieve against the forfeiture which is incurred when theVendor retains payments already made under the contract, it is difficult to see why itshould be unjust to relieve the purchaser against forfeiture of the interest in the propertythat results in exactly the same circumstances. No doubt where the parties have chosen tomake time of the essence of the contract the grant of relief against forfeiture as apreliminary to an order for specific performance will be exceptional. Nevertheless onprinciple we can see no reason why such an order should not be made if it will not causeinjustice but will on the contrary prevent injustice. Ifreliefagainst the forfeiture is granted,the objection to the grant of specific performance is removed.33

This paper will not examine the conflicting cases referred to abovesuffice to say that Dixon J. in McDonald v. Dennys Lascelles Ltd. 34

explained the difference in approaches on the basis that the view adoptedin the Kilmer and In re Dagenham cases.

seems to have been that relief should be granted, not against the forfeiture of theinstalments, but against the forfeiture of the estate under a contract which involved the

28 (1722) 23 E.R. 642.29 (1873) L.R. 8 Ch. App. 1022.30 [1913] A.C. 319.31 [1916] 1 A.C. 275.32 [1916] 2 A.C. 599.33 Legione v. Hateley 305.34 (1933) 48 C.L.R. 457,478.

J


retention of the purchase money: and this may have been the ground upon which LordMoulton proceeded in [Kilmer's case] notwithstanding the explanation of that case givenin Steedman v. Drinkle and Brickles v. Snell

Mason and Deane JJ.

Mason and Deane JJ. commenced their judgment by stating that thecases of Steedman and Brickles were daunting obstacles confronting thepurchaser's sase.

They stand seemingly as authority for the proposition that specific performance, even byway of relief against forfeiture, is never ordered when a stipulation as to time, which is ofthe essence of the contract, has not been observed. 35

They pointed out that the claims made by the purchasers inSteedman and Brickles were fOf relief against the forfeiture of instalmentsofpurchase money, relying on the jurisdiction to relieve against penalties.They contrasted the claim made by the purchasers in this case which wasfor relief against the forfeiture of their equitable interest under a bindingcontract for sale of land. They then went on to consider the distinctionbetween a forfeiture by reason of a party's breach of contract and aforfeiture in consequence ofa voluntary act done in the exercise ofa legalright. They said:

The rule that relief is never granted in respect of forfeiture by operation of law has noapplication to a forfeiture which occurs in consequence of a voluntary act done in theexercise ofa legal right for, as we have seen, it is against such an act that reliefis ordinarilygranted. In this case rescission was the consequence of the respondent's non-compliancewith a notice given by the appellants in exercise of the right conferred by condition 5.However, condition 5 does not affect the intrinsic character ofrescission - essentially it isa voluntary act done by way ofexercise ofa legal right bringing about a legal consequence,the termination of the contract. Of course, if relief be granted against the Vendor'svoluntary act, the legal consequence flowing from that act - the rescission - is displacedand the Purchaser's equitable interest is either continued or renewed.

And concluded by saying:But ifthere be fraud, mistake, accident, surprise or some other element which would makeit unconscionable or inequitable to insist on forfeiture ofthe purchaser's interest under thecontract because he has not performed in strict accordance with its terms there is noinjustice to the innocent party in granting relief against forfeiture by means of specificperformance with or without compensation ...

A preferable course is to adjust the availability of the remedy so that it becomes aneffective instrument in situations in which it is necessary to relieve against forfeiture ofthepurchaser's interest under a contract for sale. The rule would then be expressed by sayingthat it is only in exceptional circumstances that specific performance will be granted at theinstance of a purchaser who is in breach of an essential condition.

Whether the exceptional circumstances exist in a given case hinges on the existence ofunconscionable conduct. It is impossible to define or describe exclusively all the situationswhich may give rise to unconscionable conduct on the part of a vendor in rescinding acontract for sale. None the less it may be said that where the conduct ofthe vendor, thoughnot creating an estoppel or waiver, has effectively caused or contributed to the purchaser'sbreach ofcontract there is ground for exercising the jurisdiction to relieve. And if it alsoappears that the object of the rescission is not to safeguard the vendor from adverseconsequences which he may suffer as a result ofthe contract remaining on foot, but merelyto take unconscientious advantage ofthe benefits which will fortuitously accrue to him on

35 Legione v. Hateley supra 305.


forfeiture ofthe purchaser's interest under the contract, there will be even stronger groundfor the exercise of the jurisdiction.36 (Emphasis added)

Brennan J.

In his dissenting judgment Brennan J. said,There is no equitable jurisdiction to relieve against the consequences of failure to pay theresidue of the purchase price by the due date when the parties have agreed that the time ofpayment is of the essence of their contract. 37

He did not deny the existence of relief, but limited the scope of therelief to the situation,

Where there is a stipulation which entitles the vendor to retain the whole ofthe price or ofan instalment of the price though he does not convey, the penalty can be avoided bydirecting conveyance upon payment of the balance (if any) of the price.38

In the case of Ciavarella v. Balmer the High Court stressed theimportance of the vendor's unconscionable conduct when consideringgranting relief against forfeiture.

The views of the High Court in Legione v. Hateley, taken with thestatements of Mr. Justice Kennedy in the Monarch case support the viewthat a Court will only in very special cases relieve against the forfeiture ofaparty's interest in a joint venture. This is so given the nature of thepetroleum industry and the fact that a joint venture is very much acommercial transaction where the obligation to pay one's share is criticalto the well being of the joint venture.

Penalties - O'Dea v. Allstates Leasing System (WA) Pty. Ltd. 39

Pliner and Coyle40 have considered this case and its implication forexploration and mining joint venture agreements, so the writer does notpropose to consider this case at length.

The facts ofthe case were that O'Dea and others entered into a leaseagreement with Allstates for them to lease a Mercedes Benz prime mover.The lease provided that they were to pay monthly lease payments. Clause12 of the lease provided that if the lessee defaulted in payment of anyinstalments or the performance of any of the terms of the agreement thelessor might immediately take possession of the vehicle and that allmoneys due for the unexpired term of the lease would becomeimmediately due and payable plus reasonable costs of possession. Theclause therefore provided for the lessor to not only retain the total rental onthe contract but also to retain the subject matter of the lease.

Counsel for Allstates submitted, inter alia, that where parties havestipulated that a sum of money shall become payable on a certain eventwhich, although brought about by the party required to make the payment,does not involve a breach ofcontract the question as to whether the clause

36 Op~ cit. 308.37 Ope cit. 313.38 Ibid. 312.39 O'Dea v. Allstates Leasing System (W.A.) Pty. Ltd. & Ors. (1983) 57 A.L.J.R. 172,

186.40 Pliner and Coyle Ope cit.


is a penalty or liquidated damages does not arise. The court was thereforebeing asked to consider the distinction between obligations arising as aresult of breach of contract and obligations arising as a result of nonperformance. In relation to that distinction Gibbs C.J. stated:

It has been held that where there is a contract for the payment ofa certain sum in a certainevent, and that event has happened, the sum is payable and no question ofpenalty versusliquidated damages arises: in re: Apex Supply Co., [1942] CH 108 at page 119; Alder v.Moore [1961] 2Q.B. 57 at page 65. Difficulties have arisen in the application of thisprinciple to~contracts of hire purchase which provide that in the event of termination asum representing all or part of unpaid instalments will be paid by the hirer to the owner.There was some controversy as to the position when the owner's right to terminate thecontract and receive payment arose on the happening ofany ofa number ofevents, some ofwhich were breaches and some ofwhich were not, but it has now been settled in Englandthat in such a case where the agreement is terminated by reason ofa breach committed bythe hirer, the sum payable will be a penalty unless it is a genuine pre-estimate of the losssuffered by the owner by reason of the breach: Cooden Engineering Co. Limited v.Stanford, [1953] 1Q.B. 86; Campbell Discount Co. Limited v. Bridge [1962] A.C. 600;Financings Limited v. Baldock [1963] 2 Q.B. 104. I respectfully agree with that conclusion.If however the agreement is terminated by the hirer himself, for example, because he isunable to keep up his payments, it has been held that the question whether the sum payableis liquidated damages or a penalty does not arise, since what has occurred is that the hirerhas exercised his option to put an end to the contract on paying a certain sum, and the sumfor which he has made himself liable must be paid: Associated Distributors Limited v. Hall[1938] 2K.B. 83. Conflicting opinions have been expressed as to the correctness of thatdecision ... but the question whether it was correct does not fall for consideration in thepresent case. In Dunlop Pneumatic TyreCo. Ltd. v. New Garage andMotor Co. Ltd., [1915]A.C. 79 at pp86-87 Lord Dunedin said,

'The question whether a sum stipulated is penalty or liquidated damages is a question ofconstruction to be decided upon the terms and inherent circumstances ofeach particularcontract, judged of as at the time of the making of the contract, not as at the time of thebreach.'41

Gibbs C.J. concluded that the event upon which the outstandingbalance of the instalments became payable in this particular case was abreach by the lessee ofits obligations, and therefore was not a case in whichunder the contract money became payable on a certain event which wasnot a breach ofthe contract. The provisions ofthe contract which requiredpayment ofthe entire rent amounted to a penalty and that Allstates' claimcould not succeed.

Brennan J. repeated that there is no question of penalty unless theobligation to pay arises upon a breach ofcontract. He concluded there wasa breach. He then considered.whether the clause in question was penal,stating that the mere obligation to pay the entire rental cannot becharacterized as penal. What gave to that obligation a flavour ofa penaltywas the lessor's right in the event ofa default by the lessees to repossess thevehicle. Brennan J. said:

Ifthe Lessor were to repossess the vehicle and recover the entire rental, he would have boththe price ofthe hiring and the possession ofthe vehicle which was to be hired. That wouldbe inconsistent with the respective rights ofthe parties under the agreement with which theagreement should be duly performed ... Unless the Lessor repossesses the vehicle, there isno ground for denying it the right to payment of the entire rental to which it is entitledunder the agreement.

41 Ope cit. 174-175.


By conferring on the lessots the right in the event of the lessees' default to recover bothpossession of the vehicle hired and the entire price of the hiring before the hiring periodexpires, clause 12 provides an incentive for the due and punctual performance of thelessees' obligations - pecuniary and other - by imposing a liability to forfeiture. Thelessees may lose both possession and use of the vehicle for the remaining period of thirtysix months and that proportion of the entire rental which is attributable to the hiringperiod remaining after repossession. Although a stipulation as to the price payable for thesale or hiring ofgoods is not itselfin the nature ofa penalty, a stipulation which providesfor the forfeiture on breach by the buyer or hirer ofboth the price and the consideration forwhich it is payable is in the nature of a penalty and equity will relieve against it. Thefoundation of the jurisdiction to relieve against forfeiture is that the stipulation for theforfeiture is really in the nature ofa penalty (Pitt v. Curotta (1931) 31 S.R. (N.S.W.) 477 atpp480-481.)42

Brennan J. concludedthat the clause in question was in the nature ofa penalty because the lessor who exacts the full measure ofhis entitlementunder the clause receives more than the damages he would suffer by manyof the defaults which enliven the clause. He stated that it being a penaltyand as the claimant was seeking the unpaid balance of the entire rental, ithaving already repossessed the vehicle, the lessees were entitled to reliefagainst the exaction ofso much offhe entire rental as is attributable to thatperiod.

Brennan J. based his decision on the doctrine of relief againstforfeiture whereas Gibbs e.J. seemed to base his decision on the rule thatcourts won't enforce penalties. That Bren'nan J. did this appears from thefollowing passage:

At the trial, the issue was simply whether the rule which refuses to sanction legalproceedings to enforce a stipulation for a penalty for breach ofcontract applied. Effect hasbeen given to that rule by courts ofcommon law as well as by the courts ofequity since thestatute 8 and 9 Will. 3,c. 11 ,S8 (see In re Newman; Ex parte Capper (1876) 4Ch.D. 724; cf.Campbell Discount Co. Ltd. v. Bridge, [1962] A.C.600 at P622). In my opinion, that rulehas no application to the liability to pay each ofthe thirty six monthly instalments. Thoseinstalments are payable not by reason ofa breach of the agreement but in performance ofthe lessees' obligations thereunder. However, an analogous equitable rule, relieving againstforfeiture ofamounts so payable, entitles the lessees to relieffrom the liability to pay anamount equal to the instalments payable in respect of the hiring period after the date ofrepossession.43

Mr. Justice Deane considered the clause in question to be a penaltyand therefore unenforceable. He considered that the amount payable bythe lessees under the contract became payable as the consequence of thelessees' breach. The principles applicable in deciding whether a sumstipulated to be payable by one party to a contract to another party uponbreach is recoverable as liquidated damages or irrecoverable as representing a penalty were considered by Deane J. in the followingmanner,

The question whether a sum stipulated is penalty or liquidated damages is a question ofconstruction.... That question must however be determined as a question of substancewhich cannot be foreclosed by statements ofthe parties in their agreement, no matter howgenuine they may be, as to their intention in stipulating the sum.... If, however, that preestimate is either extravagant and unconscionable in amount in comparison with thegreatest loss that could conceivably be proved to have followed from the breach or, judged

42 Ibid. 185.43 Ibid. 186 emphasis added.


as at the time ofmaking the contract, is unreasonable in the burden which it imposes in thecircumstances which have arisen, it is a penalty regardless ofthe intention ofthe parties inmaking it.44

Mr. Justice Wilson concluded that the clause was a penalty againstwhich the lessee was entitled to relief.

The important points which arise from the case are:(a) there must be a breach of the agreement before considerations of

penalty versus liquidated damages apply;(b) in considering whether there has been a breach, the substance ofthe

agreement will be examined;(c) if it be established that there is a penalty it will either be relieved

against by preventing a forfeiture of the subject matter of theagreement or a money equivalent thereof or it will not enforce thatpart of the clause which is penal;

(d) the question as to whether a clause is penal is to be judged at the timeof making the contract; and

(e) a court will determine whether to relieve against forfeiture in thelight of the circumstances as they turn OUt.45

The application of O'Dea's case to default clauses was analysed inthe article by Pliner and Coyle to which reference has already been made.With respect, the writer agrees with the conclusions therein reached.Rather than repeat what they say it is sufficient to state that the thrust oftheir analysis is to the effect that ifa clause sets out a mechanism whereby aparty may elect not to contribute and thereby not be in breach ofthe agreement, the question of penalty will not arise; for example in non consentclauses and sole risk and buy back clauses. Dilution clauses, deemedwithdrawals and forfeiture clauses all however involve elements offorfeiture in one form or another in consequence ofan event very much inthe form of a breach thus making it necessary to consider the question ofpenalty versus liquidated damage.

In relation to that question it is submitted that if in an explorationjoint venture a party loses its interest and funds contributed to the date ofthe forfeiture as is the case with the APEA default clause, a court will bereluctant to hold that the clause is a penalty. It is well established that uponthe forfeiture of a lease for non-payment of rent or other breach ofcovenant, a tenant remains liable to the landlord for rent and other causesof action for breach accrued prior to the forfeiture and that this is notconsidered to be pena1.46 Statements made by Brennan J. in O'Dea's casesupport this view.

It is submitted therefore that clauses similar to the APEA defaultclause will not be considered as penal and that the relevant question, in allthe circumstances, is whether equity will grant reliefagainst a forfeiture ofan interest.

44 Ibid. 189.45 Forestry Commission ofN.S. W. v. Stefanetto (1976) 133 C.L.R. 507 per Jacobs J. 524.46 Shevill v. Builder's Licensing Board (1982) 42 A.L.R. 305 see also Harthshorne v. Watson

(1938) 4 Bing NL 178, Blore v. Giulini (1903) 1 I.C.B. 356.


DOCTRINE OF ELECTION

This paper has thus far looked at the standard type ofdefault clauseappearing in Joint Venture Agreements and has considered the way a courtof equity may view such clauses.

It is now worthwhile considering the options available to nondefaulting joint venturers faced with a default ofone of the group. For thepurposes of this exercise the writer assumes a default clause similar to theAPEA clause.

The option of the non-defaulting parties is to be found within thecontract, and put simply it is whether or not to send out a default notice to aparty in default thereby triggering, inter alia, the type of automaticforfeiture set out in clause 9.6.

Generally, a breach ofcontract by one party always gives the otherparty a right to recover damages for the breach. It may be so serious as togive him the right ifhe chooses to treat himselfas discharged from furtherperformance ofthe contract and to treat the contract as at an end. He neednot do so; he may recover damages for the breach, and insist that thecontract be otherwise performed.

An important element ofajoint venture agreement is its continuingnature. Usually there are more than two parties involved. A breach of afundamental term like paying one's share will not bring it to an end unlessthere be unanimity of the non-defaulting parties to treat the contract as atan end. The agreement will not usually give a party the right to treat it asterminated. What it will do, as has been seen, is to provide a mechanism bywhich the joint venture can proceed by 'disposing' of the troublesomemember by engaging in a forfeiture of that party's interest.47

The option of choosing between two inconsistent rights is thedoctrine of election and it should be understood and kept in mind whenfaced with the default of a party to a joint venture agreement.

In the case ofSargent v. A.S.L. Developments Limited48 Mr. JusticeStephen said:

The doctrine of election as between two inconsistent legal rights is well established butcertain of its features are not without their obscurities. The doctrine only applies if therights are inconsistent the one with the other and it is this concurrent existence ofinconsistent sets of rights which explains the doctrine; because they are inconsistentneither one may be enjoyed without the extinction ofthe other and that extinction confersupon the elector the benefit ofenjoying the other, a benefit denied to him so long as bothremained in existence.

Stephen J. went on to state that for the doctrine to operate theremust be an element of knowledge on the part of the elector and words orconduct sufficient to amount to the making of an election as between thetwo inconsistent rights which he possesses.49

47 This is not the case in a farm-in agreement where a default of a fundamental clause willgive the innocent party the right of treating the contract at end. A farm-in agreement willprobably be treated by Courts in a similar fashion to cases dealing with the sale andpurchase of land.

48 (1974) 131 C.L.R. 634 per Stephen J. 641.49 Ibid. 642.


Where an agreement itself confers the inconsistent rights thefollowing points can be made:(a) There can be no question whether a party had knowledge of its

choice of rights, a party is deemed to know the terms of its owncontract.

(b) A party must take his contract as meaning what a court will assign toit when it is called upon to interpret it.

(c) The words or conduct required to constitute an election must beunequivocal in the sense that it is consistent only with the exerciseofone of the two sets ofrights and inconsistent with the exercise ofthe other (e.g. an operator accepting cash from a party in defaultwith respect to a call made by the operatorafter a default but prior tothe operator triggering the defaulting party's forfeiture).

(d) For an election there need be no actual subjective intention to elect,an election is the effect which the law attributes to conductjustifiable only if such an election has been made.

(e) Although there exists a divergency of views, detriment to the nonelecting party is probably not an ingredient ofelection. It is ofcoursean ingredient of the related issue of estoppel.

(f) The person confronted with the choice between the exercise ofalternative and inconsistent rights is not bound to elect at once. Hemay keep the question open so long as his delay does not causeprejudice to the other side.An election 'knowingly made, cannot be withdrawn even though it

has not been acted upon by another to his prejudice' and this because'estoppel depends upon what a party causes his adversary to do. Waiver byelection depends upon what the party himself intends to do, and hasdone'.5o

The importance ofthe doctrine ofelection in relation to breaches ofjoint venture agreements is the conduct of the parties after a breach hasoccurred. Care should be taken in dealing with a party in default followinga breach. It may be that a default occurs at a critical time when nondefaulting parties are unsure as to whether they want to increase theirliability by increasing their interest in the joint venture or whether theywant only to have the defaulting party pay its way. It may be that they wishto keep their option open for as long as possible. Ifthis is so it is importantthat their conduct during the intervening period will not amount to anelection one way or the other.

It is useful to consider the principle ofelection in relation to leases,to gain an insight as to how it applies to joint venture agreements. If in alease it is provided that, on breach ofcovenant by the lessee, the lessor maytreat the lease as void, or may re~enter and the lessee commits such abreach, then, subject to such equitable or statutory reliefas the lessee maybe entitled to, the lessor has the alternative rights to maintain the lease onfoot or to put an end to it. If, with knowledge ofthe breach, he accepts rentin respect of a period subsequent to the breach, he loses his right ofavoidance. The reason for this has been said to be that 'to hold the contrary

50 Ibid. 647.

Default by Joint Venturers III

might be productive ofgreat injustice for the effect would be this; it wouldenable a landlord at any period to eject a tenant after he had given himreason to suppose that the forfeiture was waived, and after the latter had,upon that supposition, expended his money in improving thepremises'.51

Applying this analogy to a joint venture it can be said that, havinghad the right to call upon a defaulting party to transfer its interest and notexercising that right, but on the contrary accepting cash from the defaultingparty based on calls made by the operator for programmes after the default,it would produce an injustice to the defaulting party to then seek to enforcethe forfeiture.

Care should therefore be taken in advising clients following a breachof an obligation to pay money which places the interest of a defaultingparty in question. Conduct following a breach may amount to an electionwaiver or may create an estoppel, any of which may prevent reliance bynon-defaulting parties upon their rights under the joint ventureagreement.

REVIEW OF RECENT CASES CONCERNING DEFAULT

Monarch Petroleum N.L. v. Mid-East Minerals N.L.52

Reasons for judgment in this case were set out in full in the AMPLABulletin. 53 The facts of the case were that Monarch Petroleum N.L.(Monarch) farmed out to Mid-East Minerals N.L. (Mid-East) an interest ina petroleum exploration permit. The farm-out agreement was a fairlystandard agreement whereby Monarch agreed to farm-out a 10% interest inthe permit in consideration for Mid-East paying for 20% of the costs ofexploring that permit through the completion of certain work on thepermit.

Clause 1.2 of the agreement provided that,1. Monarch shall when it receives any call notice from the operator immediately inform

Mid-East ofthe same and Mid-East shall thereupon pay the call to the operator for andon behalf of Monarch.

2. In the event ofa call payable by Mid-East under clause 1.2 hereofnot being paid within14 working days (or ifa well is in the course ofbeing drilled on the permit area within 7working days) ofthe date ofthe call then Mid-East shall be in default ofits obligationshereunder.

3. If Mid-East shall be in default of its obligations hereunder for 6 weeks after notice ofdefault by Monarch then immediately and thereupon this agreement shall be at an endand Mid-East shall have no further right, title or interest whatsoever in the area or thepermit and all rights and claims of either party against the other shall be foreverextinguished, abandoned, barred and at an end and any monies theretofore paid byMid-East shall be forfeited and irretrievably lost by Mid-East.

Mid-East eventually defaulted under the agreement and Monarchsent to Mid-East a copy ofa Notice ofDefault that it had received from the

5f O'Connor v. S.P. Bray Limited (1936) 36 S.R. (N.S.W.) 248,258-261.52 Monarch Petroleum (NL) v. Mid-East Minerals NL No.187 of 1982 June 1983

S.C.N.T.53 (1984) 3 AMPLA Bulletin 9.


operator. It was sent with a compliments slip. The questions that had to bedecided were:(a) whether or not Monarch had sent a default notice thereby triggering

the default clause; and(b) assuming the answer to (a) was yes, whether or not in the events

which happened the agreement was brought to an end by the defaultof Mid-East in not complying with the default notice that wassent.After stating that the farm-in agreement in question was a commer

cial agreement, and was to be interpreted as such, Sir William Forsterconcluded that what Monarch had sent to Mid-East amounted to thegiving ofa notice ofdefault by Monarch pursuant to section 3 ofthe farmin agreement and that being so, the intent of the agreement was that MidEast lost its interest thereby exposing Mid-East to no further liability. Itwas argued that Mid-East should not be permitted to take advantage ofitsown default because of well known equitable principles. However theJudge concluded that although what started the process was the nonpayment by Mid-East, what happened after that was strictly according towhat the parties had agreed. 54

This case does not take us much further other than to restate thatwith respect to commercial transactions, courts will expect parties tohonour their contracts and that they will be reluctant to interfere.

Southern Cross Exploration N.L. v. Bennett and Others55

Southern Cross Exploration N.L. (Southern) was a party to a jointventure agreement governing operations on Petroleum Exploration PermitWA64P. Southern had defaulted under the joint venture agreement inpaying calls made by the operator. On 25 November 1982 there was a deedentered into which gave Southern a further opportunity to pay the amountsin default by certain dates. The deed provided for transfers to be executed.There was one transfer executed to correspond to each of the dates forpayment. In the event that Southern failed to make its payments it lost itsinterest in the Permit and in order to effect the transfer of its interestSouthern had authorized the partners of Peat Marwick Mitchell & Co. torelease the transfers that it had already signed. Put simply ifSouthern failedto make its first payment it was to forfeit all ofits interest in and to the JointVenture.

The first payment was due to be made on 20 December 1982. It wasnot paid on that date. On 22 December 1982 the operator called Messrs.Peat Marwick Mitchell & Co. to release the signed transfer. On that daythere was a tender by Southern of a cheque for the amount in questionhowever the operator refused to accept the cheque. Southern obtained aninjunction preventing the release of the transfer. Needham J. sitting in theequity division held that Southern's first payment was not due until areasonable time had elapsed after the agreement had become binding

54 Monarch appealed against the decision but the appeal was never heard because the partiessettled the numerous disputes in which they were involved.

55 Supra n.25.


which he found -to have occurred on 17 December 1982.Following that decision negotiations between the Operator and

Southern continued but Southern failed to make the payments due. On 1March 1983 the Operator gave notice to Southern that it required each ofthe overdue payments to be made on or before 29 March 1983. Thesepayments were not made and Southern commenced proceedings forcertain declarations. The hearing came on before Helsham C.J. on 9 June1983. Still no payments had been received. Helsham C.J. found that itcould not be suggested that a reasonable time had not elapsed sinceDecember 1982. Southern was in breach ofthe Deed of25 November andthat Deed specified what was to happen in the event of breach. He couldfind no reason to interfere with what the Deed provided was to happen inthe event ofbreach and he therefore dismissed Southern's claim. Southernappealed to the Full Court ofthe Supreme Court ofNew South Wales andin the judgment of the Court Glass, J.A., held:(a) The equitable doctrine that time for performance is not essential in

the absence ofa notice giving it that operation has been traditionallyso stated as to have no application to commercial agreements.

(b) On the question of whether the discretion of Helsham C.J. hadmiscarried when he refused to grant relief against forfeiture hesaid:

The alleged discretionary error on the part of the Judge in refusing to grant relief must beconsidered in the context ofSouthern Cross's record ofdefault in relation to prior calls, itscontinuing failure to make any ofthe three payments for which the Deed provided and itsoffer to make the first payment only upon terms which represented a departure from itscontractual obligations. The adverse consequences to the syndicate ofbeing obliged to takeback a member with a continuing record of default was also a factor militating againstrelief, Legione v. Hateley 57 ALJR 292 at 309. In these circumstances I am totallyunpersuaded that the Judge's discretion in any way miscarried. 56

Southern appealed to the High Court, but its appeal wasdismissed.

SUMMARY AND CONCLUSIONS

The six points set out on page 98 ofthis paper are the sort offactorsthat in the writer's opinion will weigh heavily on a court when called uponto interpret default clauses within joint venture agreements. Courts will bereluctant to interfere with their operation.

To repeat the words of Kennedy J.:In these circumstances participants in all exploration ventures cannot contemplateanything other than a commercial operation which flows smoothly and is not liable todisruption, for example, by the default of any participant. A steady flow of funds isessential.57

A default clause providing for forfeiture of an interest and moniesexpended to the date of the forfeiture will not, it is submitted, beconsidered as penal. It should be pointed out that a defaulting party willhave enjoyed the benefit of exploration up to the date of its interest being

56 Ibid.57 Monarch Petroleum NL v. Citco Australia Petroleum Ltd. & Ors. supra n.II.


forfeited, so it is not as if a defaulting party receives no benefit under anagreement. If, therefore, the non-defaulting parties elect to invoke aforfeiture of the defaulting parties' interest the question will be whetherequity will relieve against it. Clearly ifa clause be penal, equity will eithernot enforce the clause, or will relieve against the consequences of it.·

A court may grant reliefeven if the forfeiture has no penal elementwhen the forfeiture would be unjust or would be unconscionable orinequitable. That reliefmay enable a defaulting party to continue in ajointventure with or without paying compensation, depending upon the termsof the relief: 58

A joint venture agreement is very much a commercial transaction,and it is submitted that a court will be extremely reluctant to grant anyreliefagainst a forfeiture arising under it, unless the non-defaulting partiesare guilty ofsome conduct that would make it inequitable for them to gainthe interest of a defaulting party.

Given the above, how can the APEA default clause be improved?With respect, two additions are suggested:(a) Time should be made the essence of the obligation to pay

monies.(b) Once a party be in default it should not receive any further

information.Finally it should be stressed that time can be a critical factor in

dealing with a party in default. A default will usually occur at some crucialstage of a programme and it more often than not will allow a defaultingparty to see the outcome of a programme before its interest is finallyforfeited and before it has paid any money for that programme. It goeswithout saying that this is to be avoided at all costs, but if a party simplyrefuses to pay and refuses to transfer its interest, some delays will occurwhich will penalise the other joint venturers especially the operator.Ideally therefore an operator should look to having money paid in advancefor any expensive programme. Joint venturers should be selected withcare.

Apart from the practical difficulties relating to time, the writer isencouraged by the recent developments in this area. It seems that courtswill have little sympathy for a party to a joint venture who is in wilfuldefault.

58 Lang A.G. 'Forfeiture of Interests in Land' 100 Law Quarterly Review 427,445.

Documents

DEFAULT BY JOINT VENTURERS By Alan Frank Mizen*joint venture where the question of default is particularly important. Usually there is a whole section in a jointventure agreement dealing