IN THE FRONT LINE; The Role of the Operator in Joint Ventures

It is common for one of the parties to a joint venture to have a particular wish to be the operator. This desire often arises when the party putting up the money wants to have control over how its money is spent. It can also occur when one party feels it has special expertise or long experience and, therefore, can spend money more effectively, or when the party just wants the prestige of being the operator. In addition, in slow times a consultant may look on operatorship by a client as a good “make-work” project and, accordingly, encourage its client to become the operator. Regardless of the reason and although the responsibilities, duties and liabilities of the operator, as set forth in the agreement, may be reviewed with some care, it is not often that the operator pays any great attention to the responsibilities, duties and liabilities that may not be contemplated in the agreeement and that it is assuming by being the operator. Obvious duties such as preparing proposed programs, making reports and keeping the property in good standing are common and are usually provided for in the agreement. There are, however, responsibilities, duties and liabilities that arise by operation of law and/or by reason of the circumstances in which the operator may find itself. Some such matters that may or may not be addressed in the agreeement include the following:

The operator is in the front line and the other venturers are somewhat “behind the scenes.” If there is a problem, it is the operator who first deals with it. It may be that the other venturers either will let the operator deal with the problem alone or, if the operator has caused the problem and the other venturers have suffered damages, launch an action against the operator themselves. The agreement should address the question of the operator’s potential liability, but you can rest assured: first, if the venturers suffer a loss because of the actions of the operator, these provisions will be closely examined and may be found wanting; and second, the operator will be the party that has to deal with third parties and try to solve problems.

The operator has all the information on the project. The other venturers gain their information, for the most part through the operator. It is true that most agreements give venturers access to the records of the operator, but there is no obligation on them to exercise their rights of access. In any event, the other venturers will not have the first-hand, or field, knowledge of the operator, even if they do review the records. So what? So, this can place the operator in a special relationship to the other venturers with respect to how the operator may use the knowledge gained as operator.

For example, if the operator learns of some properties that are available for acquisition in the vicinity of the project, it may well be that the operator cannot acquire them on its own behalf and must at least offer the other venturers an opportunity to participate in them with the operator. In this type of situation, the agreement will have to be looked at to see if the situation was anticipated, but so also will the circumstances. Questions should be considered, such as: Are the properties of interest only because of knowledge gained from the project?, Are the properties on the same or similar geological structures or trends?, and Would the properties be attractive to the operator (or a third party) in the absence of the project? There are all sorts of potential questions that might be asked (especially by an inventive counsel in court), but, unfortunately, the answers do not come as readily and probably won’t be clear-cut. In many instances, subjective views and valuations will be involved, and always there is the possibility of an innocent action being made to look devious or worse in retrospect. In this regard, the absence of an area-of-interest provision and the presence of a “corporate opportunity” provision (a clause stating that the interests of the parties under the agreement do not inhibit them from taking advantage of opportunities to acquire properties or enter into other ventures even if they are in the vicinity of the project) may not protect the operator.

The operator may find itself in the unenviable position, pursuant to the provisions of the agreement, of having an obligation to perform where there are one or more delinquent venturers. This could result in the operator being required to resort to its own funds in order to fulfil such an obligation and then having to chase or even sue the delinquent venturer for repayment. An example: where the operator is obligated to maintain the property of the joint venture in good standing and the agreement does not contain any wording that makes it clear that the operator is not obligated to fulfil this, or other, obligations unless it is in funds to do so.

In some instances, the operator will be entitled to receive a management fee for rendering its services under the agreement. A management fee is not the usual allowance for administration and overhead, but rather is a fee paid in addition to any reimbursement of expenditures or allowances — it represents a profit to the operator. If the operator receives a management fee then, if there are problems, the courts will probably expect the operator to exercise a higher standard of care than if no such fee was paid.

The operator will certainly enjoy the public recognition and prestige of being the party in charge of, and responsible for, a successful venture. But if problems arise with the project, the operator will no doubt receive “public recognition and prestige” accordingly. In addition, it will have to deal with the public, the press and, very possibly, the shareholders of some of the venturers. Such dealings can be not only time-consuming and a nuisance, but also problematic from a legal point-of-view. For example, how much information can an operator properly disclose to a non-party to the agreeement? The agreement itself may answer the question, probably by indicating that all information is confidential unless consents are given by the parties to disclosure. It must, however, be noted that, human nature being what it is, a persistent questioner will, in all likelihood, get something out of even the most tight-lipped operator. Even if, under the agreement, the operator has an unrestricted right to disclose information to the public (which is highly unusual), it would be an imprudent operator that disclosed substantive information to a third party before disclosing it to the parties to the agreement.

The operator of a multiple party joint venture has as many masters as there are venturers and will no doubt have to deal with a committee through which instructions will be funneled. Clarity of communication will be a problem and there is often a tendency for an operator to ignore the committee, at least somewhat. This can all lead, or contribute, to misunderstandings, conflicts and even lawsuits. On the other hand, the operator of a 2-part joint venture has the advantage of dealing with the other venturer face-to-face. But if there is a falling-out between them, the operator may also be faced with cumbersome and time-consuming (and project-delaying) procedures to break deadlocks.

It also is important to remember that the operator is wearing two hats — venturer and operator — and that each hat has separate duties and obligations attached to it. In short, the appointment as operator of a project must be looked on as a double-edged sword — the one edge being the benefits derived from such an appointment, including in most cases, the practical (if not contractual) ability to direct the course of the project; and the other, the potential contractual and common law obligations, duties and liabilities that may arise outside, or sometimes even despite, the provisions of the governing agreement. If, however, one does not close one’s eyes and is properly trained, both edges of the sword are visible and are available for use to the swordsman.