Oil & Gas: Forfeiture, Settlement and Government Consent

In Petroleum Exploration (PVT) Ltd v Frontier Holdings Ltd & Anor [2026] EWHC 56 (Comm), the English Commercial Court gave rare insight into a forfeiture dispute under a Joint Operating Agreement. Specifically, the case considers what happens when parties settle a forfeiture dispute by agreeing the transfer of participating (or working) interests and apportionment of historic cash call costs, but the settlement then unravels due to the lack of government consent.

Facts

The claimant, Petroleum Exploration (PVT) Limited (“PEL”), is a company incorporated in Pakistan which held petroleum exploration licences and production leases over the Badin IV North and South oil and gas blocks. 

The first defendant, Frontier Holdings Limited (“FHL”), is incorporated in Bermuda. The second defendant, Spud Energy Pty Limited (“Spud”), is incorporated in Australia. 

PEL was granted 100% working interest in each Badin IV block in Pakistan, governed by Petroleum Concession Agreements (“PCA”).

Subsequently, PEL entered into a series of farm-in transactions with, amongst others, FHL and Spud, whereby parts of its working interests were assigned to them. PEL’s working interest in each of the Badin IV blocks stood at 47.5%, whilst FHL’s stood at 27.5% in each block.

Following the farm-in transactions, PEL, Spud and FHL entered into a suite of interrelated agreements, and principally Joint Operating Agreements (“JOA”) which governed their joint venture. 

The JOAs follow a broadly familiar pattern. The operator (in this case, PEL) proposes a budget, which, following approval by the holders of the working interests, enables the operator to make cash calls. The ultimate penalty if such a cash call is not met is to entitle the non-defaulting holders of the working interests to forfeit the interest of the defaulter, subject to approval by the Director General of Petroleum Concessions (“DGPC”) on behalf of the Government of Pakistan. The JOAs each contained an arbitration agreement. 

In 2015, a series of disputes arose between the parties, which largely related to the alleged non-payment of cash calls and the validity of forfeiture notices issued by PEL as a result of that alleged non-payment. These disputes concerned not only the Badin IV blocks but also other assets in the parties’ wider relationship – namely the Kandra block, with which FHL was concerned, and the Badar Concession, in which Spud had an interest. Two arbitrations were commenced: one arbitration was commenced by PEL against FHL, and the other commenced by FHL against PEL. These disputes were settled by a settlement agreement (the “Settlement Agreement”). 

The Settlement Agreement was governed by English law and included an entire agreement clause, together with a provision for disputes to be resolved by arbitration in London under the ICC Rules. Its substantive terms provided, amongst other things, that:

1. Subject to DGPC’s approval, FHL and Spud were to use reasonable commercial efforts to assign and transfer their working interests in the Kandra block and Badar Concession to PEL, with FHL and Spud holding their respective interests on trust for PEL pending receipt of DGPC’s approval;
2. FHL and Spud were relieved of various past expenditure claims in respect of the Kandra block and the Badar Concession, and FHL’s accounts in respect of the Kandra and Badin IV blocks were reset to zero;
3. Save to the extent summarised above, FHL continued to hold its other working interests in those assets where PEL also had interests, including the Badin IV North and the Badin IV South blocks. FHL would also continue to be obliged to pay its working interest share of all approved costs and expenses in accordance with the Badin IV concession documents, being principally the Badin IV JOAs.

The Settlement Agreement settled the parties’ existing JOA disputes but did not settle claims for or in relation to breaches of obligations arising from the parties’ future conduct in relation to the Badin IV North and South concession documents. That carve-out was relevant to PEL’s concern that some of the declarations made in the London Arbitration might be read as extending to future disputes, although FHL and Spud confirmed before the Commercial Court that they did not contend for that effect.

The transfer of working interests contemplated by the Settlement Agreement could not be implemented because DGPC withheld consent to the transfers. 

PEL alleged that FHL and Spud were in breach and sought to unwind the settlement. PEL further served forfeiture notices over FHL’s working interests. FHL and Spud maintained that the transfer obligations were conditional on DGPC’s consent, which had been withheld because PEL itself had failed to pay sums due to DGPC.

London Arbitration Award

On 10 December 2022, FHL and Spud commenced an ICC arbitration in London (the “London Arbitration”) under the Settlement Agreement - seeking declarations that FHL had not breached the Settlement Agreement by failing to transfer certain oil and gas rights and that PEL was instead in breach as it was responsible for the failure to obtain the relevant approvals. On 11 January 2023, PEL issued notices purporting to forfeit FHL’s interests in the Badin IV blocks and to withhold FHL’s 27.5% share of gas revenues from Badin IV South.

In a partial final award (the “Award”) dated 12 December 2024, the sole arbitrator, Mr Michael M. Collins SC, amongst other things, decided that:

1. FHL and Spud had not breached any of the terms of the Settlement Agreement in the manner alleged by PEL.
2. PEL was in breach of the terms of the Settlement Agreement by failing to discharge its obligations to DGPC, thereby causing DGPC to withhold consent to the transfers of the working interests.
3. The Settlement Agreement was extant and continued to apply to the parties to this arbitration.
4. FHL continued to be a 27.5% working interest owner of Badin IV North and a 27.5% working interest owner of Badin IV South under the Settlement Agreement
5. PEL was not and is not entitled to reverse or set aside the costs adjustments made in the Settlement Agreement in respect of Badin IV South and/or Badin IV North, as they had been finally settled. 
6. PEL was not and is not entitled to seek forfeiture of FHL’s working interests in Badin IV South and/or Badin IV North. 
7. PEL was in breach of the relevant provisions of the Settlement Agreement by reason of PEL having procured the withholding of the payments due to FHL in respect of certain sale invoices.

Singapore Arbitration Award 

On 7 February 2023, FHL commenced separate ICC proceedings against PEL in Singapore (the “Singapore Arbitration”) under the JOAs, alleging that PEL had breached the JOAs by demanding operating costs and seeking to forfeit FHL’s working interests.

PEL successfully challenged the tribunal’s jurisdiction on the basis that the disputes in question should have been referred to domestic arbitration in Pakistan.

Singapore International Commercial Court’s (“SICC”) Decision 

On 30 December 2024, the SICC set aside the decision of the tribunal in the Singapore Arbitration. The SICC decided that in construing the JOAs and PCAs, the majority of the ICC tribunal erred in contending that it had no jurisdiction to hear or determine the disputes. 

English Commercial Court Decision

PEL challenged the Award from the London Arbitration under section 67 of the Arbitration Act 1996. It accepted the arbitrator’s jurisdiction to make findings on breach, but contended that he lacked jurisdiction to grant declarations regarding FHL’s working interests, PEL’s non-entitlement to forfeiture, PEL’s withholding of sale payments and to award damages. PEL contended that these matters fell within the scope of the JOAs and would have to be dealt with by an arbitral tribunal appointed under the JOA arbitration agreements in Singapore. FHL and Spud argued that the disputed declarations and monetary awards were not causes of actions or claims under the JOAs, but instead were remedies sought by FHL and Spud for PEL’s breach of the Settlement Agreement. On their case, it followed from the arbitrator’s conclusion that PEL had breached the Settlement Agreement that PEL was not entitled to forfeit FHL’s interest.

FHL and Spud also sought a final anti-suit injunction to restrain PEL from pursuing proceedings in Pakistan in breach of the Settlement Agreement’s arbitration clause.

The Commercial Court dismissed PEL’s challenge in its entirety and granted the anti-suit injunction.

Where a settlement agreement contains a dispute resolution provision different from and incompatible with the clause in the earlier agreement, the parties are likely to have intended the settlement agreement clause to ‘supersede the clause in the earlier agreement and apply to all disputes arising out of both agreements.’ This is because the settlement clause comes second in time, is the operative clause governing issues concerning the validity or effect of the settlement agreement, and avoids the risk of inconsistent findings by different tribunals.

On the facts, the Commercial Court decided that it was ‘highly improbable’ that a reasonable person with all the background knowledge which would have reasonably been available to the parties when they entered into the Settlement Agreement would conclude that the parties intended for issues concerning breach and causation to be decided by one tribunal under the Settlement Agreement, and issues concerning remedies to be decided by another under the JOAs. 

The Commercial Court drew a distinction between: (i) a matrix of different contracts entered into at or about the same time governing different aspects of the parties’ relationship, where it may be relatively straightforward to conclude that different dispute resolution mechanisms apply to different aspects of the relationship; and (ii) a settlement agreement entered into years after the original agreements to resolve earlier disputes, where the ‘one stop’ presumption applies. On the facts, the Settlement Agreement represented a fundamental shift in the parties’ relationship, pointing firmly to the conclusion that all disputes arising out of its alleged breach would be resolved in accordance with the dispute resolution machinery it contained.

As to the relationship between the two proceedings, the judge held that the Singapore Arbitration was ‘essentially immaterial’ to the jurisdiction issue. Although by the time of the English hearing the SICC had reversed the Singapore tribunal’s earlier finding of no jurisdiction, the Commercial Court reasoned that the same dispute was capable of giving rise to a breach of both the Settlement Agreement and the JOAs. There was ‘nothing wrong in principle in seeking the same or similar remedies by alternative routes.’ The question was exclusively one of construction of the Settlement Agreement’s arbitration clause, and the existence of parallel proceedings under the JOAs did not narrow its scope.

Comment

For those dealing with forfeiture and transfer issues under JOAs (and PCAs), whether that results in a settlement agreement or not, the key points are:

1. Consent: In most jurisdictions, regulatory or government consent is required to transfer participating (or working) interests, whether that transfer is a result of forfeiture or consensual transfer. That requirement creates specific challenges, particularly as to the status of the relevant participating (or working) interest pending consent. 
2. Trust mechanisms: One mechanism envisaged by the AIEN Model Joint Operating Agreement 2023, in relation to forfeiture, is to bridge the gap between the date of forfeiture and the date of consent / completion by creating a trust over the participating (or working) interest in favour of the transferee. This approach is also seen in many agreements to sell or transfer interests. 
3. Challenges whilst in trust: The existence of a trust mechanism creates some specific issues and challenges:
   1. First, the relationship must be governed by a legal system that recognises trusts. Trusts are a powerful tool of English law, but are not traditionally recognised in most civil law jurisdictions. For that reason, the accompanying Guidance Notes to the AIEN Model Joint Operating Agreement 2023 suggest alternative contractual arrangements that replace the concept of trust, which could involve the concept of an escrow arrangement.
   2. Second, consideration should be given to whether such a trust arrangement is lawful under the terms of the production sharing contract (licence, or concession), and, if not, the legal and regulatory consequences. For example, Article 8.4.I of the AIEN Model Joint Operating Agreement 2023 will only create a trust insofar as it is lawful under ‘the Contract and applicable Laws’, which may create issues in some civil law jurisdictions even if the law of the JOA or transfer agreement is English law.
   3. Third, the terms of the trust. For example, the mechanism by which cash calls on the legal owner are satisfied. 
4. Obligations concerning consent: Where consent is to be sought, it would be usual to include express ‘endeavours’ obligations, or similar provisions, concerning the obtaining of those consents. For example, upon forfeiture, Article 8.4.I of the AIEN Model Joint Operating Agreement 2023 requires that ‘[t]he Defaulting Party shall promptly join in such actions as may be necessary or desirable to obtain any Government approvals required regarding such proposed withdrawal and assignment’ and that ‘[t]he Non-Defaulting Parties shall use reasonable endeavours to assist the Defaulting Party in obtaining such approvals’. Absent express agreement, English law may imply a term. In addition, trust law may require certain actions by the trustee in any event upon instruction from the beneficiary. 
5. When things do not go as planned: Whether the transfer is the result of a settlement of a dispute or a consensual transfer / sale, the issue then arises as to what occurs if consent is not forthcoming. That issue can ‘bite’ in multiple ways. For example:
   1. The regulator or government may withhold consent as a way of extracting a concession and payment for perceived breached of the underlying PCA (licence, or concession). In extreme circumstances, this may amount to a little more than a ‘shake down’. The scope of the endeavours obligations and/or steps that a party may need to take to obtain consent may then become critical. In this case, the transferee clearly had problems with the relevant regulator that it struggled to overcome. In turn, it was determined that this put it in breach of the Settlement Agreement – underlining a core aspect of the bargain. 
   2. Another issue is what happens with the transfer if consent cannot be obtained. Does a trust endure, or is it anticipated that there will be some complete unwind of the deal? One of the issues in this case seemed to be that PEL sought to ‘unwind’ the deal through what seems to be an effort to terminate the transaction at law. That failed. However, even if it succeeded, it would have likely required a recission (collapsing the deal ab initio), or the application of express terms agreed by the parties to unwind the forgiven historic cash calls. 
6. Dispute resolution provisions: Finally, where the legal document requiring transfer is not the JOA, thought should be given to whether issues relating to transfer may arise under the JOA and that transfer document (whether a sale SPA or settlement agreement) and perhaps the PCA. It may be possible to align dispute resolution provisions to ensure that any dispute under the JOA (and PCA) and transfer agreement can be consolidated, but that requires careful drafting. If that is not done, there is significant potential for parallel disputes to arise, as this case demonstrates. Where a dispute under a JOA has been settled and a settlement agreement entered into, issues concerning breach of that settlement agreement are likely to fall within the scope of the dispute resolution provision, notwithstanding the JOA arbitration agreement. However, that does not prevent other parallel disputes under the JOA from having to be dealt with under the JOA. 

The above are just a small number of the very real challenges that can be created by consent issues concerning transfer of participating (or working) interests. These, and many others, can arise out of a JOA, a settlement agreement, or a sale and purchase agreement / farm-out agreement. Each jurisdiction and circumstance will pose its own challenges, so relying only on model form drafting is unlikely to be sufficient. Careful thought will need to be given to what occurs where issues arise in obtaining consent.