Find a Lawyer
Book an appointment with us, or search the directory to find the right lawyer for you directly through the app.
Find out more
Al Adalla
Read MoreA complete spectrum of legal services across jurisdictions in the Middle East & North Africa.
Funding Defaults in Oil & Gas JOAs: Forfeiture, Dilution, and the Penalty Rule
7 min 45 sec
April 1, 2026 (Edited)
Written by
y.abulfailat@tamimi.com 
View LinkedIn Profile
Why forfeiture matters in JOAs
The basic bargain in an oil and gas joint-operating agreement (JOA) is simple enough: a group of participants shares risk and reward in an oil or gas project in proportion to their participating interests. Apart from the operator’s broader obligations, the core duties of the non-operating participants are to:
- fund their share of costs when invoiced;
- respond to cash calls; and
- provide any agreed security, all by reference to their participating interest.
When a participant stops paying, the operator and co-venturers face a familiar problem: suing for a debt in a distant jurisdiction is rarely satisfactory, and default may even be deliberately used as a “priced or strategic exit”, particularly in late-life assets where costs exceed revenues and forfeiture can appear economically rational. A participant may also delay funding to await reservoir performance data or to escape an unattractive project, underscoring the need for a deterrent (but not punitive) remedy.[1]
For that reason, JOAs almost invariably contain a suite of contractual default remedies, usually escalating in severity and ultimately threatening the defaulting party’s participating interest itself. That, in turn, raises the obvious English law question: When does a forfeiture or similar remedy amount to an unenforceable penalty? And if outright forfeiture is too aggressive, how can buy-out or withering provisions be structured to achieve broadly the same commercial outcome without falling foul of the penalty rule (or the anti-deprivation principle in an insolvency setting)?
This article looks at the current English law position and then turns to practical drafting techniques.
The stepped default regime: Where forfeiture sits in the hierarchy
Modern JOAs — including the Association of International Energy Negotiators (AIEN) Model JOA (2023) and the Offshore Energies UK (OEUK) Model JOA (2009, updated November 2021) — tend to adopt a stepped default regime. The longer a default persists, or the more frequently it recurs, the more severe the consequences.
Early-stage (process) sanctions
Typical “stage one” remedies while a party is in default include that it:
- cannot convene or attend operating committee and sub-committee meetings;
- loses its voting rights at those meetings;
- is denied access to operational data and excluded from any data trading; and
- is restricted from transferring its participating interest (other than, perhaps, to a non-defaulting participant).
These measures are designed to keep decision making in the hands of those actually funding operations, without disturbing the defaulting party’s title to its interest. The sanctions must be sufficiently meaningful to stop the participants from treating default as “a short-term financing option”.[2]
Economic rebalancing while default continues
If the default continues beyond a defined cure period (for example, 30 days, or 15 days where there has been a recent earlier default), JOAs typically move into more substantive economic remedies, such as:
- having the non-defaulting participants sell the defaulting party’s production entitlements and apply the net proceeds in reduction of the outstanding debt;
- reallocating production entitlements to the non-defaulting participants whilst the default lasts; or
- enforcing security (mortgages or charges over the defaulting party’s interest).
Ultimate sanctions, forfeiture, buy out, and withering
If the default is still not cured, a number of “end game” options are common:
- straight forfeiture of the defaulting participant’s interest;
- a forced transfer (buy out) of that interest to the non-defaulting participants, often at market value, subject to a discount and net of outstanding obligations; or
- A withering option, under which only part of the defaulting party’s interest is acquired by the non-defaulting parties, calculated by reference to a formula tied to unpaid costs and project spend to date.
Forfeiture or transfer does not normally relieve the defaulting participant of its future decommissioning liabilities, so the financial consequences for a chronic defaulter can be significant in both directions.
It is these top tier, outright forfeiture, heavy discounts on buy out, and aggressive withering formulas, which are most vulnerable to challenge under the penalty rule and, in an insolvency context, the anti-deprivation principle. From a penalty law perspective, the use of a stepped escalation helps because the proportionality test is applied as at the date of the agreement: a graduated sequence makes the ultimate remedy easier to justify as part of the bargain, not a punitive bolt on.[3]
One practical complication, highlighted in Pan Petroleum Aje Ltd v Yinka Folawiyo Petroleum Co Ltd [2017] EWCA Civ 1525, is that a defaulting participant may seek interim injunctive relief to restrain enforcement of default remedies pending resolution of a dispute over the underlying cash call. In that case, the court restrained the non-defaulting parties from exercising default rights and even held them in contempt for convening a committee meeting in breach of the injunction.[4]
English law: What is a penalty post-Makdessi?
So far as the author is aware, there is still no reported English court decision squarely on a JOA forfeiture clause. The debate is therefore conducted by analogy to other commercial contexts.
The modern starting point is the Supreme Court’s decision in Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis [2015] UKSC 67. The key points for JOAs can be summarised relatively shortly.
- The penalty rule applies only to secondary obligations, namely remedies triggered by breach of a primary obligation.
- The question is whether the secondary obligation imposes a detriment out of all proportion to any legitimate interest of the innocent party in performance of the primary obligation.
- The innocent party’s legitimate interests may go beyond straightforward compensation for loss, particularly in complex, negotiated commercial deals between sophisticated parties.
In Chitty on Contracts, Solène Rowan identifies several factors supporting a finding of legitimate interest, many of which map directly onto JOA co-funding obligations:
- difficulty proving loss from individual instances of default;[5]
- difficulty detecting breach or tracing consequences of non-payment;[6]
- obligations going to the root of the contract;[7]
- solvency and systemic-risk concerns in long-term projects,[8]
which provide a natural doctrinal bridge for JOA default machinery.
In Makdessi itself, the clauses under challenge reduced the price payable for a shareholding and required a sale of retained shares if the seller breached restrictive covenants. The Supreme Court treated these provisions as, in substance, part of the price-setting mechanism in a carefully negotiated share sale rather than a penal add on, and held them to be enforceable.
Earlier authorities, such as Jobson v Johnson [1989] 1 WLR 1026 (a share transfer on default at a nominal price), have been recast by the Supreme Court as being more about relief from forfeiture than penalty as such. The modern emphasis is on:
- the characterisation of the clause (primary vs secondary obligation); and
- whether the economic effect is proportionate to a legitimate commercial interest that can be articulated and justified.
Alongside the penalty rule sit:
- the court’s equitable jurisdiction to relieve from forfeiture of proprietary or possessory interests; and
- the anti-deprivation principle in insolvency, which polices attempts to strip value away from an insolvent estate by contractual machinery triggered on insolvency.
Neither doctrine has been applied in a reported JOA case, but both are plainly relevant where a defaulting participant is teetering on insolvency and faces the loss of a valuable field interest.
It should also be noted that not all common law or common law-influenced jurisdictions follow the English law approach to penalties. The Dubai International Financial Centre (DIFC), for example, has expressly declined to adopt the English penalty doctrine. In Roberto’s Club LLC and Emain Kadrie v Paolo Roberto Rella [2013] DIFC CFI 019, paragraph 5, the Court of First Instance observed that “the English law doctrine of penalties is not imported into DIFC law”. The court therefore treated agreed contractual remedies as enforceable unless contrary to statute or public policy.
For JOAs governed by DIFC law, this means that contractual forfeiture, discounted buy out, and withering provisions are not subject to the English “secondary obligation / legitimate interest” analysis articulated in Makdessi. Instead, the focus is on whether the clause represents a freely negotiated allocation of risk between sophisticated parties and whether it offends any DIFC statutory limitation.
What do arbitral decisions tell us?
Although English courts have not yet had to rule on a JOA forfeiture, two strands of arbitral material are commonly cited.
ICC Case No 11663 of 2003 Final Award[9]
An International Chamber of Commerce (ICC) tribunal sitting in London under an English law JOA and shared management agreement upheld a forfeiture of a defaulting party’s interest. The tribunal placed weight on the fact that:
- the agreement expressly identified co-funding as a fundamental principle of the venture;
- the consequences of default were clearly signposted; and
- every participant was treated in the same way.
In other words, the clause formed part of the allocation of risk at the heart of the deal; it was not oppressive or targeted at a particular participant.
Post-Makdessi award finding forfeiture disproportionate (2014)
A later, unreported arbitration (referred to in commentary by Maxi Scherer ) involved a JOA governed by English law. The tribunal is said to have concluded that a forfeiture clause was unenforceable because there was a substantial gap between:
- the size of the unpaid cash call; and
- the value of the participating interest which would have been lost.
On the limited information available, the tribunal appears to have reasoned that the forfeiture went beyond what could reasonably be justified as protecting the non-defaulting parties’ legitimate interests.
Although neither award is binding, read together, they reinforce the Makdessi message: proportionality and a coherent articulation of legitimate interest matter.
Written by
Outright forfeiture, heavy discounts and aggressive withering formulas sit at the very top of the risk spectrum: they are the remedies most vulnerable to challenge under the penalty rule.
Forfeiture, buy out, and withering: Relative risk under English law
Against that background, how do the main “end game” mechanisms compare?
Straight forfeiture
A classic forfeiture clause provides that, if a default persists for a specified period, the defaulting participant’s entire participating interest (or licence interest) is automatically forfeited and redistributed among the non-defaulting parties, often without any compensation.
From an English law perspective, this is the most exposed structure:
- it is difficult to characterise as anything other than a secondary obligation triggered by non payment;
- the value at stake (a producing or near-producing participating interest) can be orders of magnitude greater than the quantum of unpaid cash calls; and
- justifying the outcome as proportionate to the co-venturers’ legitimate interests becomes harder as that discrepancy widens.
This aligns with Chitty’s analysis that forfeiture and compelled transfers fall squarely within the penalty jurisdiction when triggered by breach (Chitty, paragraphs 30-209; 30-252).
Where forfeiture is linked to, or triggered by, a formal insolvency process, it may also be vulnerable to an anti-deprivation challenge on the basis that it strips value from the estate at the very moment creditors need it most.
There will be extreme fact patterns where outright forfeiture can be defended (for example, repeated and egregious defaults threatening the viability of the project, combined with clear drafting and sophisticated parties). But from a risk management perspective, forfeiture should now be seen as the last resort, not the default setting. As industry analysis has long noted, forfeiture during the production phase is particularly exposed to penalty challenges because the defaulting party will already have contributed significant sunk capital, increasing the risk that forfeiture appears disproportionate (Abul Failat, section 3).
Discounted buy out
A more defensible model is for the defaulting participant to be required to sell its participating interest to the non-defaulting parties, typically:
- at market value (determined by agreement or expert);
- less its share of outstanding liabilities; and
- subject to an agreed discount designed to recognise the disruption and risk caused by the default.
If properly drafted, this can more plausibly be presented as a primary obligation. A clause may be enforceable even where it contains a deterrent element, provided it protects a legitimate interest and is not extravagant or unconscionable in its economic effect (Chitty, paragraphs 30-22;30-228).
The JOA provides that, in defined circumstances, the defaulting party must sell and the others must buy at a formula price. The fact that the formula includes a discount does not itself make the clause penal if the discount can be justified as protecting a legitimate interest, for example:
- avoiding the ongoing operational risk of being tied to an undercapitalised co-venturer;
- compensating for reputational and operational disruption; and
- providing an incentive to fund on time so that other participants are not forced to carry the defaulting party.
The closer the valuation mechanism tracks genuine economic value, and the more moderate and reasoned the discount, the stronger the argument that the clause is price setting, not punitive.
Withering options
“Withering” is an attempt to calibrate the economic effect of default more finely. Instead of an all-or-nothing transfer, the defaulting participant loses only a portion of its interest, calculated by a formula that typically takes into account:
- the defaulting party’s share of estimated project costs;
- the sums it has actually contributed to date; and
- a default factor which varies depending on how far the project has progressed (for example, harsher at early stages when other participants are still bearing significant risk).
The result is that:
- a participant who has contributed heavily but falls into a relatively modest default loses proportionately less; whereas
- a participant who has contributed little relative to its obligations is diluted more heavily.
The proportional calibration in withering models reflects the kind of graduated approach that courts have upheld when assessing whether the agreed consequence corresponds to the seriousness of the breach (Abul Failat, section 4, Chitty, paragraph 30-222), and this approach is conceptually attractive under Makdessi because the detriment imposed bears a transparent relationship to the scale and timing of the default. The price non-defaulting parties pay, however, for that is complex: withering formulas are not easy to explain to commercial teams and are correspondingly less commonly used, particularly in the MENA region.
It is noted, however, that alternatives to forfeiture, such as withering options and discounted buy outs, are not inherently risk free; depending on structure, they may replicate the same penalty concerns as outright forfeiture (Abul Failat). A steep or inflexible discount to fair market value may itself operate punitively, especially where the same mechanism applies whether the unpaid cash call is modest or substantial (Abul Failat, sections 5 and 7). The magnitude of loss exposure varies significantly across the exploration, development, and production phases, supporting lifecycle-sensitive approaches to dilution or discount mechanisms (Abul Failat, section 7).
Drafting pointers: Structuring JOAs to withstand a penalty challenge
From a drafting and negotiation perspective, there are several practical steps that can improve the defensibility of forfeiture-type remedies.
Build a coherent, escalating regime
Courts are predisposed to uphold consequences in commercial agreements negotiated by sophisticated parties of comparable bargaining power.[10]
Make sure the default provisions operate as a graduated sequence, starting with suspension of voting and information rights, and only later moving to economic rebalancing and, ultimately, interest-shifting remedies. Industry practice recognises that immediate “step-in” funding by the non-defaulting parties is essential to maintain compliance with the granting instrument, with the default amount treated as a debt accruing interest.[11]
Avoid jumping straight from a relatively short-lived default into a drastic forfeiture. Courts and tribunals are more comfortable enforcing a harsh end-game where the defaulter has been given clear warnings and meaningful opportunities to cure.
Articulate the ‘fundamental principle’ of co-funding
Consider stating expressly that timely payment of cash calls and provision of security are fundamental to the venture and that a sustained failure to fund risks the integrity of the project as a whole. This kind of recital or statement of principle will support the argument that the default remedies go to the heart of the bargain, not mere punishment.
An obligation that goes to the root of the contract, such as co-funding in a JOA, strongly supports a finding of legitimate interest in ensuring timely performance.[12]
Prefer buy-out (or carefully calibrated withering) to bare forfeiture
Where you have a choice:
- favour a buy-out mechanism which ties the price to a notion of value and explains any discount in rational, commercial terms;
- use withering if the parties can live with the complexity and want a visibly proportional solution; and
- reserve straight forfeiture either for egregious breaches or as a default where buy-out and withering have been offered and declined.
In our experience, a variety of formulae can be used to determine the buy-out price or the withered portion, including mechanisms based on:
- the ratio between the default and the amounts paid to date;
- the proportion of project spend to the estimated total development cost; or
- the stage of the project’s lifecycle at the time the default occurs.[13]
Make valuation and mechanics robust
For buy out and withering clauses:
- include a clear valuation mechanism (agreement, then expert determination) with tightly defined valuation assumptions and treatment of liabilities;
- deal expressly with decommissioning: will the buyer assume the defaulting party’s future decommissioning obligations, or is the seller continuing to carry them notwithstanding the transfer of its interest; and
- clarify how existing security interests (mortgages, charges, guarantees) interact with the default machinery and any transfer.
The more objectively grounded and predictable the financial outcome, the easier it is to argue that the clause is proportionate.
Some JOAs (including the AIEN 2023 Model JOA) include an express declaration that a forfeiture clause, discounted buy-out mechanism, or withering provision is not a penalty and is not a remedy to which equitable relief should apply, coupled with express waivers of any objection. Such statements are not determinative; whether a provision is a penalty is ultimately a matter of construction, and the courts will look to substance over form, but they can nevertheless help demonstrate the parties’ shared understanding of the clause’s commercial rationale and support the argument that it reflects a negotiated allocation of risk rather than a punitive device.
Think about insolvency and anti-deprivation
If a clause is triggered by insolvency as such (rather than non payment), consider:
- whether the effect is to deprive the insolvent estate of value that would otherwise be available to creditors; and
- whether the particular trigger and mechanism could be recast in terms of persistent funding default instead.
Even where the JOA is not expected to be tested in an insolvency, designing the clause to be defensible in that context is a useful stress test in that solvency risk and delay in recovering damages may themselves create a legitimate interest in actual performance rather than ex-post compensation.[14]
Accept that you cannot contract out of equitable relief – but you can influence the equities
The court’s jurisdiction to grant relief from forfeiture cannot be excluded entirely by contract. However, the factors the court takes into account are intensely fact specific. Drafting can improve your position by:
- ensuring that the defaulting party has had clear notice, reasonable cure periods, and a fair opportunity to regularise its position; and
- avoiding anything which suggests the clause is aimed at engineering a windfall for the non-defaulting parties.
In other words, make the story one of protecting the venture, not opportunism. Given that a clause found to be penal is wholly unenforceable and cannot be judicially rewritten, proportionality must be built expressly into the drafting.[15]
Final remarks
Until an English court is forced to grapple directly with a JOA forfeiture clause, the industry will continue to operate in a space shaped by Makdessi, a handful of analogies from other contexts, and a thin stratum of arbitral material. That does not mean the position is uncertain in all directions.
Well-drafted JOAs, particularly those that:
- embed default remedies within a graduated, coherent regime;
- rely on buy-out or withering rather than bare forfeiture; and
- express and genuinely reflect a legitimate commercial interest in co-funding and operational continuity
ought, under current English law principles, to be enforceable in all but the most extreme factual scenarios.
The real drafting challenge is to design a clause that will both bite hard enough to keep participants funding on time and look measured enough that a court or tribunal is prepared to let it do so.
[1] Yanal Abul Failat and Birgitte Jensen, ‘Oil and Gas Joint Operating Agreements: Default Provisions, a Dilemma by Default’, section 7, (2013), Oil, Gas & Energy Law Intelligence
[2] Eduardo G Pereira, ‘Joint Operating Agreements’, paragraphs 5-25, in Peter Roberts (ed), Oil and Gas Contracts: Principles and Practice, 4th edition, Sweet & Maxwell (2025)
[3] Solène Rowan, ‘Damages’, paragraphs 30-212 and 30-222, in Hugh G. Beale KC (ed), Chitty on Contracts, 36th edition, Thomson Reuters (2026) (Chitty)
[4] Pereira, paragraphs 5-25 (ii)
[5] Chitty, paragraphs 30-230
[6] Chitty, paragraphs 30-231
[7] Chitty, paragraphs 30-235
[8] Chitty, paragraphs 30-236
[9] ICC Dispute Resolution Bulletin, Issue 3 (2019)
[10] Abul Failat, section 6, and Chitty, paragraphs 30-210; 30-248
[11] Pereira, paragraphs 5-25(i)
[12] Chitty, paragraphs 30-235
[13] Abul Failat, section 6
[14] Chitty, paragraphs 30-236
[15] Chitty, paragraphs 30-263
Next Article
