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CJEU rules on validity of natural resources agreements

On 27 February 2018 the CJEU issued its judgment in the Western Sahara Campaign case (Case C-266/16). In a short judgment, the court held that the 2006 partnership agreement in the fisheries sector (Fisheries Agreement) and a 2013 protocol to that agreement are inapplicable to the territory of Western Sahara. This was because including Western Sahara within the scope of these agreements would be contrary to “rules of general international law applicable in relations between the EU and Morocco”, particularly the principle of self-determination, and to the UN Convention on the Law of the Sea.

Why are we writing about fish in an Energy blog? As we explained in an earlier post on this case, the international law principles on which it turns are potentially relevant to other agreements about natural resources in areas where local populations claim rights of self-determination.

By interpreting the Fisheries Agreement and the 2013 protocol in this way, the CJEU did not have to determine whether agreements that did deal with resources in Western Sahara would be valid under EU and international law (a question Advocate General Wathelet answered in the negative). Nevertheless, the court’s willingness to invoke and apply international law principles, in particular that of self-determination, is an interesting demonstration of the possible impact of those principles. This may well be of broader importance with regard to agreements that purport to deal with other territories whose populations assert – or may in future assert and gain support for – the right to self-determination.

The court’s judgment relies heavily on its December 2016 judgment in Polisario (Case C-104/16), issued after the request for a preliminary ruling was made in Western Sahara. In Polisario, the court had held that the Euro-Mediterranean “association” agreement (the Association Agreement), as well as a Liberalisation Agreement (concerning liberalisation measures on agricultural and fishery products) had to be interpreted, in accordance with international law, as not applicable to the territory of Western Sahara. The Association Agreement and Liberalisation Agreement were initially also included in the Western Sahara reference, but in light of Polisario those aspects were withdrawn by the English High Court.

When interpreting the scope of the Fisheries Agreement and the 2013 protocol, AG Wathelet had considered that, unlike the agreements addressed in Polisario, the Fisheries Agreement and the 2013 protocol were applicable to Western Sahara and its adjacent waters. He reached this view on several bases, finding it was “manifestly established” that the parties intended the agreements to include Western Sahara, that their subsequent agreements and actions were consistent with this interpretation, and that it was also supported by the genesis of the agreements and previous similar agreements.

The court took a different view (without reference to the AG’s Opinion). First, noting the Fisheries Agreement is stated to be applicable to “the territory of Morocco”, the court held that this concept should be construed as meaning “the geographical area over which the Kingdom of Morocco exercises the fullness of the powers granted to sovereign entities by international law, to the exclusion of any other territory, such as that of Western Sahara”. It stated that, if Western Sahara were to be included within the scope of the agreement, that would be “contrary to certain rules of general international law that are applicable in relations between [the EU and Morocco], namely the principle of self-determination”.

The Fisheries Agreement also refers to “waters falling within the sovereignty or jurisdiction” of Morocco. Referring to the UN Convention on the Law of the Sea, the court noted a coastal state is entitled to exercise sovereignty exclusively over the waters adjacent to its territory and forming part of its territorial sea or exclusive economic zone. Given Western Sahara did not form part of the “territory of Morocco”, the waters adjacent to it equally did not form part of the Moroccan fishing zone referred to in the agreement. A similar conclusion followed with regard to the 2013 protocol’s scope.

While more closely tied to the text of the fisheries agreements than the AG’s Opinion, the judgment suggests the court may seek to arrive at an interpretation of such agreements that respects international law insofar as possible. It is therefore a significant restatement of the importance of international law principles, particularly self-determination, to questions regarding sovereignty over natural resources in occupied territories, and therefore has potential ramifications for international agreements which purport to deal with such resources.

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CJEU rules on validity of natural resources agreements

EU Advocate General restates importance of self-determination to validity of natural resources agreements

In a landmark opinion, Advocate General Wathelet (the AG) of the European Court of Justice (CJEU) has invited the court to conclude that fisheries agreements between the EU and Morocco are in violation of the international law principle of self-determination, and therefore invalid under EU law. It comes as a clear reminder that EU institutions must respect international law principles binding upon them when entering into international agreements.

If the court follows the AG’s lead, the case could have ramifications for other territories whose populations may claim rights to self-determination, such as Catalonia and the Kurdistan Region of Iraq, and for the validity under international law of agreements with the states occupying those territories.


The territory of Western Sahara is occupied by Morocco, a situation widely considered to breach the principles of international law entitling peoples to self-determination. The UN recognises Western Sahara as a non-self-governing territory occupied by Morocco.

The reference to the CJEU emanates from an English court case brought by Western Sahara Campaign UK, an NGO aiming to support the recognition of the Western Saharan people’s right to self-determination. It argues that the EU-Morocco agreements (insofar as they purport to apply to Western Sahara) violate that right and so are contrary to the general principles of EU law and to Article 3(5) of the Treaty on European Union, under which the EU is required to respect international law. Under the agreements, the EU paid Morocco for access to waters including Western Sahara’s.

As the measures in question related to the validity of EU law, the English court referred the case to the CJEU, itself characterising Morocco’s presence in Western Sahara as a “continued occupation”.

The Advocate General’s Conclusions

Article 3(5) of the Lisbon Treaty states that the EU will respect the principles contained in the UN Charter, of which Article 1 sets out the principle of self-determination of peoples, while Article 73 promotes self-government. Yet the EU fisheries agreements with Morocco purport to deal with waters off the coast of Western Sahara.

The AG considered, first, that, where the relevant principles of international law (here, both treaty and customary law forming part of general international law) are “unconditional and sufficiently precise”, a claimant can rely on them to challenge EU actions. He noted that the right of self-determination, because it formed part of the law of human rights, was not subject to these requirements, but in any event met them. Similarly, (i) the principle of permanent sovereignty over natural resources and (ii) the rules of international humanitarian law applicable to the exploitation of Western Sahara’s natural resources were also sufficiently precise and unconditional to be invoked by the NGO.

Examining whether the fisheries agreements breached the international legal principles in play, the AG examined in some detail the historical background to Morocco’s occupation. An advisory opinion issued by the International Court of Justice in 1975 had stated that Western Sahara was not a “territory belonging to no one” at the time of its earlier occupation by Spain. A referendum on self-determination under UN auspices was thus envisaged, but Morocco considered this unnecessary on the basis the population had already de facto determined themselves in favour of returning the territory to Morocco. The AG, however, concluded that Western Sahara was integrated within Morocco “without the people of the territory having freely expressed its will in that respect”.

Because the fisheries agreements with Morocco make no exception for Western Sahara, the AG considered the EU is in breach of its obligation not to recognise an illegal situation resulting from the breach of the right to self-determination, and to refrain from rendering aid or assistance in maintaining that situation.

The AG also emphasised that as “Western Sahara is a non-self-governing territory in the course of being decolonised … the exploitation of its natural wealth comes under Article 73 of the United Nations Charter and the customary principle of permanent sovereignty over natural resources”. He found that the fisheries agreements did not contain the necessary legal safeguards to ensure that the natural resources were used for the benefit of the people of Western Sahara. On that basis also, in his view the provisions of the agreements were not compatible with EU or international law.

Impact of the opinion

It remains to be seen whether the CJEU will follow the AG’s opinion. The opinion is nevertheless significant, not only for the Western Saharan situation. It is a robust restatement of the importance of the right to self-determination, and of the consequences that may flow where it is held to be breached, as well as of the importance of the protection of natural resources in occupied territories.

The arguments set out in this opinion will undoubtedly influence independence discourse in territories as disparate as Catalonia and Kurdistan, and the CJEU’s decision, expected at the end of February, will be keenly anticipated.

The reaffirmation of the principle of permanent sovereignty over natural resources is of particular interest regarding the Kurdistan Region of Iraq, where the exploitation of natural resources has been a contentious issue for decades. Kurdistan’s status as a semi-autonomous region with the right to manage its oil resources is enshrined in Iraq’s 2005 Constitution, and the Region has not declared independence.  Although not analogous with the Western Sahara situation, one can envisage questions being raised as to the compatibility with international law of any agreements which states may have or may enter into with the Iraqi federal government that relate in some way to resources in Kurdistan territory.  It may well be argued that these too fail to respect the Kurdish people’s sovereignty over their natural resources and/or their right to self-determination (as well as potentially breaching the constitutional provisions).  The AG’s comments as to the unconditional and precise nature of these principles paves the way for challenges before national courts on the basis that these are binding upon states, which may not enter into agreements that disregard them.

Case C-266/16 Western Sahara Campaign, Opinion of Advocate General Wathelet, 10 January 2018

The authors are grateful to Seonaid Stevenson, a trainee solicitor at Dentons, for her assistance with this piece.

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EU Advocate General restates importance of self-determination to validity of natural resources agreements

Does the Supreme Court’s ruling in Cavendish increase the likelihood of JOA forfeiture provisions being enforceable?

In November 2015, the Supreme Court took the opportunity to review and recast the English law on penalties, in Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67.  The decision has been of particular interest to the oil and gas community, where the enforceability of JOA forfeiture provisions has long been the subject of debate.

The Cavendish ruling was welcomed by English lawyers, coming as it did some 100 years after the previous leading authority, Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79.  In the intervening period, English case law had sought to refine the penalties test, with results that were sometimes helpful and at other times confusing.  The result was, according to the Supreme Court, “an ancient, haphazardly constructed edifice which has not weathered well“.

Before Cavendish, any analysis of whether a clause was a penalty would likely have started with Lord Dunedin’s four “tests” from the Dunlop case and his focus on whether the sums payable amounted to a genuine pre-estimate of loss or a deterrent.  Post-Cavendish, the test is now clearer.  The key question is whether the relevant clause is a secondary obligation and, if it is, whether it is out of all proportion to any legitimate interest of the innocent party in its enforcement.

So, the first task is to establish if the obligation is a primary obligation or a secondary obligation.  A primary obligation would, for example, be an obligation to pay for services (even if a part of that payment is contingent on future behaviour, as it was in Cavendish) provided under a contract; a secondary obligation would be an obligation to pay liquidated damages on breach.  Only if the clause is a secondary obligation can it be a penalty, as the English courts will not interfere in the parties’ original commercial bargain.

The second task is then to investigate the legitimate interest of the innocent party in the enforcement of the clause.  In Cavendish, for example, this focused on the interest of the buyer in ensuring that the seller adhered to certain restrictive covenants to ensure that the goodwill in the value of the company’s shares was preserved.

JOA forfeiture provisions take many forms.  However, most operate on the basis of certain key principles.  First, they apply to circumstances where a contractor has failed to pay its share of costs when due.  Second, they require the other contractors to pay the defaulting contractor’s share of costs, pro rata to their participating interests.  Third, where the default remains unremedied, the defaulting contractor is required to assign (or “forfeit”) some or all of its participating interest to the non-defaulting contractors.

Whether such provisions amount to primary obligations under the JOA will be determined by the wording used.  Generally, those we have seen more naturally fall within the category of secondary obligations.  However, the legitimate interest of the non-defaulting contractors will be similar across most JOAs; the continuity of the operations and compliance with their obligations to the Government that has granted them rights in the given contract area.  The non-defaulting parties will argue with some force that these legitimate interests justify the partial or complete exclusion of a party that is unwilling to bear its share of costs, particularly where the innocent contractors have had to bear those costs themselves.

Whether the forfeiture provisions are proportionate to these legitimate interests will depend on their precise terms and, importantly, the commercial context.  Some commentators have suggested that it may be easier to argue that forfeiture is proportionate where costs incurred are relatively low and the prospects for the contract area uncertain, for instance during the exploration phase of operations.  This is one reason for the range of remedies often to be found in JOAs, where mandatory assignment and withdrawal provisions may be accompanied by buy-out and withering interest options.

It remains to be seen to what extent Cavendish has affected the enforceability of JOA forfeiture provisions.  Whilst the Supreme Court’s focus on legitimate interests over genuine pre-estimate of loss or deterrence is undoubtedly helpful for parties seeking to enforce such provisions, it may be argued that English case law had already been moving in that direction.  More recent case law had, for example, tended to focus on the commercial justification for the sums payable; the legitimate interests test is arguably an extension of this.  Non-defaulting contractors would likely have deployed the same (persuasive) arguments in support of a commercial justification test as they now would in support of their legitimate interests.

Further, two English law principles that are key to analysing JOA forfeiture provisions were established long before Cavendish.  The first is that, where a contract has been negotiated by properly advised parties of comparable bargaining power, there is a strong presumption that they are the best judges of what is legitimate and that the court should therefore not interfere (Philips Hong Kong Ltd v Attorney General of Hong Kong (1993) 61 BLR).  In the sophisticated world of oil and gas exploration and production, the vast majority of contracts will meet this description.

Second, Lord Dunedin made clear in Dunlop that the analysis of whether or not a clause is a penalty must be carried out at the time the contract was entered into, not at the time of breach.  In addition, he emphasised that the fact that it may be difficult to estimate what the true loss would be is no obstacle to enforceability (and may, indeed, be a reason to uphold the parties’ original bargain).  In JOAs, the loss suffered by the non-defaulting contractors as against the value of the interests to be forfeited by the defaulting party may well be difficult (if not impossible) to estimate at the time the JOA is entered into, which may help persuade a court to uphold the terms agreed.


Does the Supreme Court’s ruling in Cavendish increase the likelihood of JOA forfeiture provisions being enforceable?