Arbitration regarding internal agreements in production sharing contracts

Various contractual conflicts arise between the parties in a production sharing agreement regarding its implementation in a certain phase and stage.

The reason for this is undoubtedly the duration of the production sharing agreement in the long term (from 10 to 50 years).

Tribunals reach interesting conclusions when resolving disputes.

In this regard, the case of Monde Petroleum SA v. WesternZagros Limited (January 14, 2015), in which the Queen Bench Division of the Commercial Court sided independently illustrative.

Here is the extraction from the reached decision.

The dispute between the parties originates from an agreement for consultancy services dated 23 April 2006 ("the CSA"), by which WZL engaged the services of Monde to assist WZL in concluding and maintaining the exploration and production sharing agreement ("EPSA") which WZL was negotiating with the KRG, and in relation to business opportunities in the region more generally.

It provided for Monde to receive monthly fees, enhanced payments upon the achievement of certain milestones, and an option in certain circumstances to share in the benefit of a successful EPSA by acquiring a 3% interest.

The CSA contained a London arbitration clause.

In January 2007 WZL stopped paying the monthly fee invoiced by Monde, and on 16 March 2007 WZL purported to terminate the CSA pursuant to a contractual termination provision. WZL disputed that the unpaid amounts invoiced by Monde, which included a milestone payment, were due.

On 18 April 2007 the parties entered into a settlement agreement ("the Termination Agreement"), under which WZL was to pay Monde's disputed invoices in full and there was a mutual release and waiver of all claims by each party against the other in respect of the CSA. The Termination Agreement contained a clause conferring exclusive jurisdiction on the courts of England and Wales.

The Court alledged: it is not necessary to decide the "interesting question" of what the position would be if and when the Termination Agreement were rescinded in the Commercial Court proceedings.

If that occurred, the Tribunal could "see some force" in the argument that the restriction in the scope of the arbitration agreement brought about by the Termination Agreement no longer applies and that Monde's claim for damages for the alleged wrongful termination of the CSA was then covered by the arbitration agreement.

However in such circumstances there would be no possibility of Monde now falling back on its claims in the arbitration, because they had been withdrawn, and any new claims in arbitration would be time-barred.