The Association of International Energy Negotiators (AIEN) have recently released their latest version of their standard form JOA (AIEN JOA 2023). As usual, it includes Guidance Notes that have been released at the same time.
Despite its international moniker, the AIEN JOA is heavily influenced by North American practice and is therefore not commonly found in the UK (the OEUK has an equivalent version) but it is the most often used model globally, and, while there is nothing overtly surprising in the 2023 version, recent geo-political events and significant updates in industry practice have resulted in changes which are at least worthy of a quick look:
NEW PROVISIONS
GHG Emissions
The clauses which address the issue of GHG emissions are not detailed – they include a definition of greenhouse gases, oblige the operator to conduct operations in a manner which mitigates their emissions and to report on GHG emission data in line with internationally recognised guidelines – but their importance lies in the fact that they were included at all. The model form JOA is intended to act a foundation for negotiating the terms of a long term legal relationship, and to include clauses on GHG emissions illustrates that, at the very least, oil companies (IOC) can and should have a role in climate governance. Ultimately, their effectiveness will not simply depend on how many IOCs include them in their JOAs, but on how far the Operators and other Participants develop these terms into non-contractually based practices of good climate governance.
Human Rights
For the first time, the JOA contains provisions on Human Rights. They are few, and very general but the Drafting Committee felt their inclusion was important. Their definition of Human Rights comes from several sources: the UN Declaration of Human Rights (1948), the ILO Declaration and Fundamental Principles and Rights at Work, and the UN Guiding Principles on Business and Human Rights (Part II).
Sanctions
Previous iterations of the AIEN JOA (2012 and 2002 being the most commonly active) did not contain anything on economic sanctions, but the current conflict in Ukraine and the Russian invasion last year has certainly brought the issue far enough into the foreground for it to warrant the drafting of several provisions:
Generally, it defines economic sanction laws as being those of the state of their – and their parent companies’ – place of business. There is also the option of adding broader wording that recognises sanction laws of large and influential bodies (namely, the UN and the EU, as well as the laws of the United States and the United Kingdom).
There is an express obligation for Operators to establish and implement policies which ensure compliance with relevant economic sanction laws. There is also the optional wording which obligates Operators to impose similar requirements on any of its contracts. Additionally, there is express wording that exonerates parties from performing duties under the JOA if they violate economic sanction laws – this explicitly includes failure to pay joint account charges where such non-payment is a requirement under sanction law (ordinarily this would result in a default). The Force Majeure provision has also been amended to provide relief from the requirement to meet payment obligations if they violate sanction law.
The JOA also takes into consideration how frequently mergers and changes to company control take place within the industry, doing so on two levels: first, it prohibits M&A transactions which fall foul of relevant sanction laws; second, parties which do violate sanctions as a result of a change of control are to be treated as defaulting parties until the violation has been corrected.
Finally, there is optional wording which expands the JOA’s withdrawal provisions to permit parties to withdraw when one of the other participants has violated sanction laws. In doing so, their rights would not be assigned to the sanctioned party.
UPDATED PROVISIONS
Decommissioning
Decommissioning provisions have been significantly broadened, particularly Exhibit E (which is entirely optional): legacy wells are now explicitly considered, specifically within the context of decommissioning costs (legacy wells are wells in production prior to the JOA coming into effect – possibly historically abandoned at some point – and which continue to produce for the joint venture). Parties to the JOA also have more powers to ensure that the venture’s decommission obligations are satisfied.
Default
The withering interest provisions have survived the new iteration of the JOA, but are now optional. Additionally, defaulting parties are now obliged to hold their interest in trust for the non-defaulting parties.
Exclusive Operations
The new JOA now includes a risk-based premium, which is payable by non-consenting parties of exclusive operations who decide to exercise their ability to reinstate their previously relinquished rights to the operation – this was identified as a gap by the Drafting Committee. An additional alternative was also added which turns an exclusive operation into a joint operation if the total combined participating interest is equal to or greater than the passmark.
At the end of August, the Canadian Federal Court dismissed a statutory appeal made by Haida Tourism Limited Partnership (Haida) against a decision of the Ship-Source Oil Pollution Fund (SOPF) Administrator. In doing so, it raised a few interesting points and gave us an excuse to take a quick look at one of the more claimant-protective ship-source oil pollution damage compensation regimes out there.
Facts:
On 08 September 2018, the Tasu I – an accommodation barge owned and operated by Haida – came loose from its mooring buoy in Alliford Bay, Haidi Fwaii, and drifted to a grounding point in Bearskin Bay on Lina Island, BC, Canada, where it released a mixture of gasoline and/or diesel. Haida contacted the Canadian Coast Guard about the incident and attempted to assuage the oil pollution damage caused by the grounding.
In late December 2018, Haida submitted a claim to the SOPF – pursuant to s103(1) of the Marine Liability Act SC 2001 c6 (MLA) – to recuperate the costs and expenses it incurred as a result of its mitigation efforts. They claimed the Tasu I’s mooring lines had been intentionally and wilfully tampered with by a third party, with the intent to cause harm, thereby providing Haida with a defence against liability under s77(3)(b) MLA. In early August 2021, the SOPF’s Administrator denied the claim and Haida appealed.
The appeal did not assess the validity of the defence put forward in the initial claim (or other factual matters), but focussed on a question of law, specifically, on the interpretation of s103 of the MLA and whether it permits a right of recovery for costs and expenses by the shipowner when such costs and expenses are incurred as a result of preventing, repairing, remedying or minimizing potential oil pollution damage when the incident has been caused solely by the shipowner’s own ship.
Haida
Canadian law:
The Marine Liability Act 2001 addresses matters of maritime claims and liability. Of relevance to the appeal were Parts 6 and 7, which address liability and compensation for oil pollution damage, and the SOPF, respectively.
Division 1 of Part 6 gives several ship-source pollution conventions the force of law in Canada, including the International Convention on Civil Liability for Bunker Oil Pollution Damage, 2001 (Bunker Convention), the International Convention on Civil Liability for Oil Pollution Damage, 1992, (CLC) and the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage, 1992 (Fund Convention).
The CLC imposes a capped, strict liability regime upon the shipowner of oil tankers/vessels adapted for the carriage of oil that cause oil pollution damage. In situations where the shipowner does not pay (because they are unable to/have reached the liability cap/ benefit from a defence), victims are able to seek compensation via a fund set up by the Fund Convention.
The Bunker Convention – which is similar in nature to the CLC but applies to pollution damage caused by spills from any seagoing vessel’s bunker oil (rather than cargo oil) – has no equivalent fund or Fund Convention.
Part 6, Division 2 concerns itself with liability that has not been covered by the international conventions incorporated into law by Division 1. Of particular note is s77 MLA, which – subject to some limited exceptions – imposes strict liability on a shipowner for oil pollution damage from their ship (s77(1)(a)), as well as for the costs and expenses incurred by the Minister of Fisheries and Oceans (a response organization under the Canada Shipping Act 2001), or any other person in Canada, in respect of measures taken to prevent, repair, remedy or minimize oil pollution damage from the ship, including measures taken in anticipation of a discharge of oil from it, to the extent that the measures taken and the costs and expenses are reasonable, and for any loss or damage caused by those measures (s77(1)(b)).
Liability for pollution and related costs
77 (1) The owner of a ship is liable
a) for oil pollution damage from the ship;
b) the Minister of Fisheries and Oceans in respect of measures taken under paragraph 180(1)(a) of the Canada Shipping Act, 2001, in respect of any monitoring under paragraph 180(1)(b) of that Act or in relation to any direction given under paragraph 180(1)(c) of that Act to the extent that the measures taken and the costs and expenses are reasonable, and for any loss or damage caused by those measures, orany other person in respect of the measures that they were directed to take or refrain from taking under paragraph 180(1)(c) of the Canada Shipping Act, 2001 to the extent that the measures taken and the costs and expenses are reasonable, and for any loss or damage caused by those measures; and
(c) in relation to pollutants, for the costs and expenses incurred by
i. the Minister of Fisheries and Oceans in respect of measures taken under paragraph 180(1)(a) of the Canada Shipping Act, 2001, in respect of any monitoring under paragraph 180(1)(b) of that Act or in relation to any direction given under paragraph 180(1)(c) of that Act to the extent that the measures taken and the costs and expenses are reasonable, and for any loss or damage caused by those measures, or
ii. any other person in respect of the measures that they were directed to take or refrain from taking under paragraph 180(1)(c) of the Canada Shipping Act, 2001 to the extent that the measures taken and the costs and expenses are reasonable, and for any loss or damage caused by those measures.
Part 7 lays out the specifics of the SOPF, which was set up as a fund of first recourse, providing an extra layer of protection to ship-source oil spill victims by compensating them in situations where a shipowner is either unable to do so, refuses to do so or is not obliged to do so, irrespective of whether any of the above conventions apply (s101)[1]. The SOPF is a unique feature in oil pollution damage compensation, combining the benefits of the CLC regime and the American one – the USA, not being a party to the CLC, set up a similar regime (encompassed in its Oil Pollution Act 1990), including a fund which covered situations akin to those compensable under the Fund Convention, as well as situations outside of it.
Canada’s Ship-Source Oil Pollution Fund does not cap its limits and includes pay outs for pure economic loss.
Liability of Ship-source Oil Pollution Fund
101(1) Subject to the other provisions of this Part, the Ship-source Oil Pollution Fund is liable in relation to oil for the matters referred to in sections 51, 71 and 77, Article III of the Civil Liability Convention and Article 3 of the Bunkers Convention in respect of any kind of loss, damage, costs or expenses — including economic loss caused by oil pollution suffered by persons whose property has not been polluted — if
a) all reasonable steps have been taken to recover payment of compensation from the owner of the ship or, in the case of a ship within the meaning of Article I of the Civil Liability Convention, from the International Fund and the Supplementary Fund, and those steps have been unsuccessful;
b) the owner of a ship is not liable by reason of any of the defences described in subsection 77(3), Article III of the Civil Liability Convention or Article 3 of the Bunkers Convention and neither the International Fund nor the Supplementary Fund are liable;
c) the claim exceeds
i) in the case of a ship within the meaning of Article I of the Civil Liability Convention, the owner’s maximum liability under that Convention to the extent that the excess is not recoverable from the International Fund or the Supplementary Fund, and
ii) in the case of any other ship, the owner’s maximum liability under Part 3;
d) the owner is financially incapable of meeting their obligations under section 51 and Article III of the Civil Liability Convention, to the extent that the obligation is not recoverable from the International Fund or the Supplementary Fund;
e) the owner is financially incapable of meeting their obligations under section 71 and Article 3 of the Bunkers Convention;
f) the owner is financially incapable of meeting their obligations under section 77;
g) the cause of the oil pollution damage is unknown and the Administrator has been unable to establish that the occurrence that gave rise to the damage was not caused by a ship; or
h) the Administrator is a party to a settlement under section 109.
Section 103(1) permits the filing of claims by persons suffering loss or damage or incurred costs or expenses in respect of actual or anticipated oil pollution damage, against the Administrator of the SOPF for such loss, damage, costs or expenses. This right is in addition to those granted to claimants under s101.
Claims filed with Administrator
103(1) In addition to any right against the Ship-source Oil Pollution Fund under section 101, a person may file a claim with the Administrator for the loss, damage, costs or expenses if the person has suffered loss or damage, or incurred costs or expenses, referred to in section 51, 71 or 77, Article III of the Civil Liability Convention or Article 3 of the Bunkers Convention in respect of any kind of loss, damage, costs or expenses arising out of actual or anticipated oil pollution damage, including economic loss caused by oil pollution suffered by persons whose property has not been polluted.
The appeal:
Haida initially framed its claim under s101, being based on the view that they needed to satisfy one of the criteria under s101 before being able to proceed with s103. It was noted in the initial decision made by the Administrator against Haida that ss101 and 103 were separate and independent mechanisms for claims and that requiring the establishment of criteria in s101 in order to proceed with a s103 claim contradicts the express wording, “in addition to any rights against the [SOPF] under s101,” and would also reduce access to justice by imposing additional burdens on the claimant. Haida had been permitted to recategorize their claim under s103(1) and thus argue that the provision did not preclude a shipowner from making a claim for costs and expenses in situations where they had a defence to liability. Additionally, ‘liability of the shipowner’ and ‘costs and expenses’ were separate under s77.
Even with the permitted re-categorisation, the Administrator viewed this interpretation as problematic for several reasons.
First, the Administrator (sensibly) did not believe that s103’s reference to art 3 of the Bunker Convention (which expressly imposes liability on the shipowner for pollution damage) was intended by its drafters to sever shipowner liability from loss, damage, costs and expenses. And since a shipowner is incapable of being liable to itself, the Administrator did not believe it was possible for Haida to make its claim under s103 by using art 3 of the Bunker Convention.
Secondly, s77’s express reference to costs and expenses could not be divorced from shipowner liability when the provision was read in its full context – it is perfectly possible for a shipowner to suffer losses (including costs and expenses) when their ship is damaged in an oil spill incident, but not under s77(a)-(c) as that would result in the shipowner being liable to itself. For this reason, s77 could also not be used by Haida for its claim under s103(1).
The Federal Court agreed with this interpretation and further pointed out that simply benefitting from a defence from strict liability under s101 did permit a claim for costs and expenses under s103(1) as they were distinct claims processes. In addition, when investigating and assessing a s103(1) claim, the Administrator is restricted to considering only two factors (s105(1)). Neither of these two factors involve consideration of a shipowner’s defence to its strict liability, and when viewed within the overall context of Parts 6 and 7, the obvious and correct conclusion of s103(1) not creating a right for a shipowner to recover costs and expenses incurred during damage mitigation in an incident was correct.
[1] Where a shipowner is liable but does not pay out, the Administrator settles the claims and then subrogates the claimants’ rights in order to pursue the shipowner. They are also able to commence actions in rem either against the ship or the proceeds from the sale of the ship (s102).
The London Steam-Ship Owners’ Mutual Insurance Association Ltd v The Kingdom of Spain M/T “PRESTIGE” (No. 5) [2022] EWCA Civ 238 (01 March 2022), concerns a reference to the CJEU by Butcher J, arising out of the longstanding litigation between Spain and the owners’ P&I Club in connection with the Prestige oil spill in 2002. The Club had appealed against an order registering the judgment of the Spanish Supreme Court on 28 May 2019. The appeal was fixed for a two-week trial from 2 December 2020 to determine (i) as a matter of law, whether the judgment entered by Hamblen J constituted a judgment within the meaning of Article 34(3) and, if not, whether that judgment and the arbitration award (and the res judicata to which they give rise as a matter of English law) could be relied upon and (ii) as a matter of fact and law, whether the Spanish Proceedings had breached the human rights of the defendants, including the Club.
Spain made an application seeking the reference of six questions to the CJEU (later adding a seventh) and invited Butcher J to determine that application at the hearing of the appeal in order to be in a position to lodge any request with the CJEU before “the Brexit cut off” with the end of the Implementation Period on 31 December 2020. On 21 December 2020 Butcher J then referred three issues to the CJEU.
“(1) Given the nature of the issues which the national court is required to determine in deciding whether to enter judgment in the terms of an award under Section 66 of the Arbitration Act 1996, is a judgment granted pursuant to that provision capable of constituting a relevant “judgment” of the Member State in which recognition is sought for the purposes of Article 34(3) of EC Regulation No 44/2001?
(2) Given that a judgment entered in the terms of an award, such as a judgment under Section 66 of the Arbitration Act 1996, is a judgment falling outside the material scope of Regulation No 44/2001 by reason of the Article 1(2)(d) arbitration exception, is such a judgment capable of constituting a relevant “judgment” of the Member State in which recognition is sought for the purposes of Article 34(3) of the Regulation?
(3) On the hypothesis that Article 34(3) of Regulation No 44/2001 does not apply, if recognition and enforcement of a judgment of another Member State would be contrary to domestic public policy on the grounds that it would violate the principle of res judicata by reason of a prior domestic arbitration award or a prior judgment entered in the terms of the award granted by the court of the Member State in which recognition is sought, is it permissible to rely on 34(1) of Regulation No 44/2001 as a ground of refusing recognition or enforcement or do Articles 34(3) and (4) of the Regulation provide the exhaustive grounds by which res judicata and/or irreconcilability can prevent recognition and enforcement of a Regulation judgment?”
At the time of making the reference Butcher J had not decided the Club’s human rights argument. That was decided against the Club in May 2021, after the end of the Implementation Period, and could not be referred to the CJEU. The reference, C-700/20, was heard by the CJEU on 31 January 2022 and the opinion of the Advocate General is expected on 5 May 2022, with the judgment of the CJEU to be delivered at any time thereafter.
The Club appealed the decision of Butcher J, and on 1 March 2022 the Court of Appeal held that Butcher J did not have the authority to refer the questions to the CJEU. The necessity test mandated in Art 267 of 267 of the Treaty on the Functioning of the European Union would only be satisfied if the European law question is conclusive of the issue which the national court has to decide on a particular occasion in accordance with its national procedure. The judge’s discretion as to whether to make a reference only arises once the test of necessity has been satisfied. That was not the case here as Butcher J had not decided the human rights policy issue raised by the Club. Unless and until that issue had been determined against the Club, the questions referred could not be said to be conclusive or even substantially determinative of the appeal. The questions could have been resolved entirely in Spain’s favour, yet the Club could have won on the human rights issue. Looking at previous CJEU authority in Cartesio Oktato es Szolgaltato bt (Case 210/06) [2009] Ch 354 it was clear that as a matter of national law a reference can be set aside on appeal.
The Court of Appeal allowed the appeal and set aside the Judge’s order referring the questions to the CJEU. However, only the referring judge has jurisdiction to withdraw the reference. The Court of Appeal referred to Butcher J, pursuant to CPR 52.20(2)(b), the question of whether, in the light its judgment, he should withdraw the reference he made to the CJEU on 21 December 2020. The Court of Appeal indicated that the hearing should take place as soon as possible, and in any event in time for any decision to withdraw the reference to be effective.
Yesterday, the Supreme Court, for whom Lord Hamblen gave judgment, allowed the appeal in the Okpabi Nigerian oil spill case against Shell’s UK parent, Royal Dutch Shell, Okpabi & Ors v Royal Dutch Shell Plc & Anor [2021] UKSC 3 (12 February 2021). This comes shortly after the decision of the Dutch Court of Appeal in parallel proceedings involving oil spills in other parts of Nigeria with claims against Shell’s Dutch parent and its Nigerian subsidiary.
The Supreme Court criticised the approach of both the court at first instance and of the Court of Appeal in allowing what was in effect a mini-trial based on the voluminous evidence before the Court. This was incorrect for interlocutory proceedings. Legally, in the light of the Supreme Court’s decision in Vedanta which was given after the Court of Appeal’s judgment in Okpabi, various errors of law were apparent in the approach of the majority of the Court of Appeal.
The case made against RDS was that it owed the claimant a common law duty of care because, as pleaded, it exercised significant control over material aspects of SPDC’s operations and/or assumed responsibility for SPDC’s operations, including by the promulgation and imposition of mandatory health, safety and environmental policies, standards and manuals which allegedly failed to protect the appellants against the risk of foreseeable harm arising from SPDC’s operations. The issue of governing law pointed to the application of Nigerian law under the Rome II Regulation and it was agreed that the laws of England and Wales and the law of Nigeria wee materially the same. The majority of the Court of Appeal (Simon LJ and the Chancellor) held that there was no arguable case that RDS owed the appellants a common law duty of care to protect them against foreseeable harm caused by the operations of SPDC. Sales LJ delivered a dissenting judgment in which he explained why he considered there was a good arguable case that RDS did owe the appellants a duty of care.
The pleaded case and the legal argument in the courts below focused on the then understood threefold test for a duty of care set out in Caparo Industries plc v Dickman [1990] 2 AC 605 and, in particular, whether there was sufficient proximity and whether it would be fair, just and reasonable to impose a duty of care. This was incorrect in the light of this court’s decision in Vedanta, where Lord Briggs had stated [49] “the liability of parent companies in relation to the activities of their subsidiaries is not, of itself, a distinct category of liability in common law negligence”.
The appellants recast their case based on Vedanta with the following four routes:
(1) RDS taking over the management or joint management of the relevant activity of SPDC;
(2) RDS providing defective advice and/or promulgating defective group-wide safety/environmental policies which were implemented as of course by SPDC;
(3) RDS promulgating group-wide safety/environmental policies and taking active steps to ensure their implementation by SPDC, and
(4) RDS holding out that it exercises a particular degree of supervision and control of SPDC.
Apart from corporate material from the Shell group there was also the evidence of Professor Jordan Siegel who produced an expert report in 2008 in litigation in the United States involving RDS’s immediate predecessors as SPDC’s parent companies. He considered that these documents showed that “The Royal Dutch/Shell Group of Companies tightly controls its Nigerian subsidiary, SPDC. This control comes in the form of monitoring and approving business plans, allocating investment resources, choosing the management, and overseeing how the subsidiary responds to major public affairs issues.” He summarised various corporate documents that post-dated his 2008 report and explains that, “there has been no material change in the senior management of the Shell Group’s ability to tightly control SPDC” since that report. Hes tated that the role of the RDS ExCo is “fundamentally the same” as the predecessor Committee of Managing Directors.
Apart from the error of conducting a mini-trial, there were two other errors of law alleged by the appellants.
The first alleged error is in the Court of Appeal’s analysis of the principles of a parent company’s liability in its consideration of the factors and circumstances which may give rise to a duty of care. The second alleged error is in the court’s overall analytical framework for determining whether a duty of care exists in cases of this type and its reliance on the Caparo threefold test.
The approach of the Court of Appeal had to be considered in the light of the guidance subsequently provided by this court in Vedanta. To the extent that the Court of Appeal indicated that the promulgation by a parent company of group wide policies or standards can never in itself give rise to a duty of care, that was inconsistent with Vedanta. At para 52 of Vedanta Lord Briggs said that he did not consider that “there is any such reliable limiting principle”. He pointed out that: “Group guidelines … may be shown to contain systemic errors which, when implemented as of course by a particular subsidiary, then cause harm to third parties.” This is what the appellants have described as Vedanta route (2).
Secondly, the majority of the Court of Appeal may be said to have focused inappropriately on the issue of control. Simon LJ appears to have regarded proof of the exercise of control by the parent company as being As Lord Briggs pointed out in Vedanta, it all depends on: “the extent to which, and the way in which, the parent availed itself of the opportunity to take over, intervene in, control, supervise or advise the management of the relevant operations … of the subsidiary.[49]” Control was just a starting point for that question. Lord Hamblen stated:
“The issue is the extent to which the parent did take over or share with the subsidiary the management of the relevant activity (here the pipeline operation). That may or may not be demonstrated by the parent controlling the subsidiary. In a sense, all parents control their subsidiaries. That control gives the parent the opportunity to get involved in management. But control of a company and de facto management of part of its activities are two different things. A subsidiary may maintain de jure control of its activities, but nonetheless delegate de facto management of part of them to emissaries of its parent.” [147]
A specific example of a case in which a duty of care may arise regardless of the exercise of control was provided by what the appellants have described as Vedanta route (4), based on what Lord Briggs stated at para 53:
“… the parent may incur the relevant responsibility to third parties if, in published materials, it holds itself out as exercising that degree of supervision and control of its subsidiaries, even if it does not in fact do so. In such circumstances its very omission may constitute the abdication of a responsibility which it has publicly undertaken.”
The Supreme Court then went on to consider whether these errors were material to the decision of the Court of Appeal.
It held that the case set out in the pleadings, fortified by the points made in reliance upon the RDS Control Framework and the RDS HSSE Control Framework, established that there was a real issue to be tried under Vedanta routes (1) and (3). It was not necessary to make any ruling in relation to Vedanta routes (2) and (4), and the Court preferred not to do so given that the pleading has not been structured around such a case, although it observed that there was currently no pleaded identification of systemic errors in the RDS policies and standards.
Lord Hamblen concluded [154]:
“Whilst I consider that the appellants’ pleaded case and reliance on the RDS Control Framework and the RDS HSSE Control Framework is sufficient to raise a real issue to be tried, that conclusion is further supported by their witness evidence, as summarised when setting out the appellants’ case above, and, for reasons already given, the very real prospect of relevant disclosure being provided. That prospect is specifically borne out by the evidence of Professor Siegel and the identification of some of the most likely documents of relevance in the Dutch proceedings.”
Prefering, generally, the analysis of Sales LJ to that of the majority of the Court of Appeal he noted observations of Sales LJ at para 155 that it was significant that the Shell group is organised along Business and Functional lines rather than simply according to corporate status. This vertical structure involves significant delegation
The appellants argued that the Shell group’s vertical organisational structure means that it is comparable to Lord Briggs’ example of group businesses which “are, in management terms, carried on as if they were a single commercial undertaking, with boundaries of legal personality and ownership within the group becoming irrelevant” (para 51). How this organisational structure worked in practice and the extent to which the delegated authority of RDS, the CEO and the RDS ExCo was involved and exercised in relation to decisions made by SPDC were very much in dispute, as apparent from the witness statements. It wa also an issue in relation to which proper disclosure was of obvious importance. It clearly raised triable issues.
The Dutch Court of Appeal has held that Shell Nigeria is liable for two pipeline spills in Oruma and Goi that took place between 2004-05. Shell had argued that the spills were caused by sabotage, so-called ‘bunkering’. Under Nigerian law, which was applied pursuant to the Rome I Regulation, the company would not be liable if the leaks were the result of sabotage. However, the court said that Shell had not been able fully to prove the causes of the spill. Although the parent company Royal Dutch Shell was not found directly responsible, the court ordered it to install a leak detection system on the Oruma pipeline, the source of several spills in the case – a finding of great interest in the ongoing debate about tort and multi-national companies..
Another case involving pipeline spills in Nigeria, Okpabi v Royal Dutch Shell, came before the UK Supreme Court last June. A previous UK case involving spills in the Bodo area was settled in 2015.
Lack of unambiguous drafting in a gas sales contract landed three hydrocarbon giants in the Court of Appeal today; it also raised a nice point about damages and counterfactuals.
In British Gas v Shell UK [2020] EWCA Civ 2349, Shell and Esso agreed to supply, and BG to buy on a take-or-pay basis, a minimum daily quantity of gas (appearing in the forest of acronyms typical of hydrocarbon contracts as a TRDQ, or Total Reservoir Daily Quantity). The sellers controlled a couple of reservoirs which, together with others, were connected to the well-known Bacton terminal in Norfolk. As might be expected, gas from all the connected reservoirs was commingled before it came on shore, and the owners of the various reservoirs, including the sellers, had a practice of “borrowing” gas from one another to meet variations in demand. In order to protect BG’s interests, the sellers in addition undertook under Clause 6.4 of the contract to “provide and maintain a capacity (herein referred to as the ‘Delivery Capacity’) to deliver Natural Gas from the Reservoirs” amounting to 130% of the relevant daily quantity. If the capacity was reduced, then the sellers had a right to reduce the TRDQ proportionately.
As capacity in the North Sea ran down, the sellers’ capacity to supply from their own reservoirs dipped below the magic figure of 130%, though if you took into account their capacity to borrow gas the capacity remained adequate. BG saw an opportunity to sue the sellers. It argued that (1) “capacity” meant capacity from the sellers’ own reservoirs, excluding borrowed gas; and (2) had the sellers reduced the TRDQ to 100/130 of the reduced capacity, it would have bought in all excess requirements more cheaply elsewhere.
The Court of Appeal held for BG on (1): capacity on an ordinary interpretation meant capacity from the sellers’ own resources, not third parties’, so that the sellers were in breach. On damages, however, it held that BG had suffered no loss. The sellers had had a right, but no duty, to reduce the TRDQ in line with the total capacity; they had not done so; and the fact that they might have avoided being in breach of the 130% stipulation had they done so was beside the point.
The decision in (1) seems right as a matter of interpretation, and also sensible: apart from anything else, capacity clauses exist to assure certainty of supply, and would be somewhat devalued if they took into account possible arrangements that the seller might enter into with third parties.
The damages point is an awkward one, as is always the case with the fiendish counterfactual question “what would have happened if the defendant hadn’t been in breach?” It turns, it is suggested, on a proper interpretation of the sellers’ contractual obligation. Was it (i) to maintain a capacity to supply amounting to at least 130/100 of the TRDQ, or (ii) to set a TRDQ amounting at most to 100/130 of its capacity to supply (not quite the same thing)? Given the provision that there was a right but no duty to reduce the TRDQ in line with capacity, the latter answer seems correct. If so it follows, at least in the view of this blog, that BG’s claim against the sellers for substantial damages was rightly rejected as a claim for failing to do what they had not been bound to do in the first place.
Just one more thing. Before you file this case away as a useful piece of ammunition on the damages point, remember that in every case of this sort, the answer – and often many millions of dollars – is likely to turn on a careful reading of the underlying contract. A decision on one particular piece of wording may well not be a reliable guide to another.
Crucial measures to further reduce greenhouse gas (GHG) emissions from ships will be discussed by IMO’s Marine Environment Protection Committee (MEPC) met between 16-20 November to discuss measures to reduce further greenhouse gas emissions from shipping.
The IMO’s website notes that the MEPC is expected to adopt amendments to the International Convention for the Prevention of Pollution from Ships (MARPOL) to significantly strengthen the “phase 3” requirements of the Energy Efficiency Design Index (EEDI) – meaning that new ships built from 2022 will have to be significantly more energy-efficient. Those amendments were approved at the previous session of the Committee (MEPC 74) in May 2019.
The MEPC will also discuss two further energy efficiency requirements comprising draft amendments which were agreed by IMO’s Intersessional Working Group on Reduction of GHG Emissions from Ships (ISWG-GHG 7) in October, and would also apply to existing ships:
a new Energy Efficiency Existing Ship Index (EEXI) for all ships;
an annual operational carbon intensity indicator (CII) and its rating, which would apply to ships of 5,000 gross tonnage and above.
If approved at this session of the Committee, they could then be put forward for adoption at the subsequent MEPC 76 session, to be held in June 2021. Under MARPOL, amendments can enter into force after a minimum 16 months following adoption.
Between 4-12 November 2020 the Norwegian Supreme Court heard an appeal from environmental groups seeking the invalidation of the granting of licenses in 2016 to conduct exploratory drilling in the South and South East Barents Sea, an area on the Norwegian continental shelf spanning about 77 acres where oil and gas fields have recently been built. Companies were awarded licenses in 2016 to conduct exploratory drilling in the South and South East Barents Sea, an area on the Norwegian continental shelf spanning about 77 acres where oil and gas fields have recently been built. Parliament approved opening the area for exploration three years earlier.
Their action is brought under the Norwegian Constitution’s environmental provisions, art. 112, which were passed in 2014. They argue that exploratory drilling licenses violate a constitutional right to a healthy environment. They claim the oil-exploration plans were not fully researched before being approved and also rely on a previously unknown expert report throwing doubt on the economic benefit of drilling in the Barents Sea, which was commissioned by the government in 2013 but not passed onto the Parliament before its vote approving exploration in the Barents Sea. The Norwegian government has said that it fulfilled its constitutional duty by compensating for negative effects on the environment in other areas.
The action has failed in the lower courts, although both recognised the right of citizens to bring actions under the environmental provisions of the Constitution, with the higher court accepting that the right involved the impact from climate emissions — including those from oil and gas exported abroad, which is the case for most of Norway’s production.
The Norwegian government intends to continue requesting exploration licences and in June 2020 announced licensing awards in predefined areas (APA) 2020 which comprises blocks in the North Sea, the Norwegian Sea, and the Barents Sea.
A follow on from our blog of 15 April 2020 where we stated, as regards the climate change suits in Baltimore, and the Fourth Circuit Court of Appeal’s denial of the defendants’ application to remove it to the federal courts – where it would be dismissed due the decision of the Supreme Court in American Electric Power Co. v. Connecticut, 131 S. Ct. 2527 (2011) (AEP), and that of the Ninth Circuit in Native Village of Kivalina v. ExxonMobil Corp., 696 F.3d 849 (9th Cir. 2012), that such actions, at least when they relate to domestic GHG emissions caused by the defendant, are pre-empted by the Clean Air Act. .
On 31 March 2020 the Defendants submitted a petition for certiorari to the US Supreme Court. on the question whether 28 U.S.C. § 1447(d) permits a court of appeals to review any issue encompassed in a district court’s order remanding a removed case to state court where the removing defendant premised removal in part on the federal-officer removal statute, 28 U.S.C. § 1442, or the civil-rights removal statute, 28 U.S.C. § 1443.
Last month the United States Supreme Court stated that it will review the Fourth Circuit Court of Appeals’ ruling. This is on the procedural ground as to what can be reviewed by a federal appellate court. Three circuit courts – including the Fourth Circuit, which ruled on Baltimore’s case – have ruled that federal officer jurisdiction is the only issue that they can review when considering the companies’ appeal of a lower court’s remand order. The seventh circuit has taken the view that that the federal officer removal statute authorizes appellate review of the entire remand order.In the Baltimore case the District Court rejected a total of eight grounds for removal but the Fourth Circuit concluded its appellate jurisdiction was limited to determining whether the companies properly removed the case under the federal-officer removal statute.
The oil major defendants are banking on the hope that the more grounds for removal that the Court of Appeal must consider, the more chance of a successful remand to the federal courts where the pesky case will meet its demise.
Apache North Sea Ltd v Euroil Exploration Ltd [2020] EWCA Civ 1397
In what circumstances will one contract be construed by reference to another? In the energy sector, the issue will often be an important one, given the prevalence of suites of contracts dealing with different aspects or layers of involvement or activity. The general rule is that “A document executed contemporaneously with, or shortly after, the primary document to be construed may be relied upon as an aid to construction, if it forms part of the same transaction as the primary document”: see Lewison, Interpretation of Contracts, 6th Edn, section 3.03. But this relates to different contracts which are “in truth one transaction” or “as it is called in modern jargon, a ‘composite transaction’” (Lewison). But what if the transactions are different ones, involving the same but also additional parties, but are related transactions?
Apache v Euroil: Summary and Take-Away Points
The Court of Appeal’s decision in Apache North Sea Ltd v Euroil Exploration Ltd [2020] EWCA Civ 1397 addressed this question in the context of a Farm-Out Agreement (the FOA) between Apache as and Euroil for the sale and purchase of minority interests in respect of a UK Continental Shelf production licence relating to the Val d’Isere block and for Apache’s participation in the associated Val d’Isere Joint Operating Agreement (the JOA) as Operator.
The Court of Appeal (as the Commercial Court before it) held that, on the terms of the specific contracts in issue, it was wrong in principle to treat the FOA and the JOA “as entirely separate contracts with Apache wearing different hats in each” and that would “not reflect the true nature of the parties’ dealings at the time” [39]. The contracts were to be construed together, and “in their proper context as a cohesive whole” [42].
While the Court stressed that it was dealing with the contracts before it and emphasised that it was not setting a “general precedent” for all FOAs and JOAs [70], the decision is significant in demonstrating a realistic approach to construing contracts which are meant to work together. As the Court stated, “Farm-out agreements do not typically exist in a vacuum. Where there is more than one owner, the parties will regulate their relationship in relation to that asset under a joint operating agreement. Farm-out agreements need to take account of and interact appropriately with those joint operating agreements to avoid inconsistencies and minimise the prospect of dispute.” [2]
The arguments in Apache v Euroil in the Court of Appeal
The issue arose out of the incurring of drilling costs by Apache in relation to an exploration “Earn-In Well”, using a drilling rig on a long-term lease. The rate for the drilling rig as incurred by Apache was one which was significantly above market rates at the time of drilling.
Apache sought payment of the drilling costs in full from Euroil in full under the FOA. In the very detailed terms of the FOA drafted, as was common ground and as the Court accepted, by “sophisticated parties represented by experienced lawyers” provision was made for the “Val d’Isere Earn-In Costs” which Euroil agreed to bear: “twenty six point twenty five percent (26.25%) of the total costs (other than the Back Costs) in relation to the Val D’Isere Earn-In Well, whensoever incurred, and in respect of all works undertaken pursuant to the Well Programme in connection with the Val D’Isere Earn-In Well”.
Euroil contended that the recovery was necessarily capped at market rates and relied upon the combination of the payment provisions in the FOA (requiring it to pay all Earn-In Costs “upon receipt of an invoice from [Apache] … in accordance with the relevant JOA within the applicable time periods as set out in the relevant JOA”), read together with provisions in the JOA to which both Apache (as Operator) and Euroil (and another) were parties. Euroil relied upon the usual ‘no gain no loss to the Operator” provision in the JOA and the detailed accounting procedure in the JOA which was used to be used for billing under the FOA, which had no billing procedure of its own. As part of that billing procedure, the cost of equipment leased by the Operator “not exceed rates currently prevailing for like…equipment”.
Apache responded that:
i. the FOA and the JOA were entirely different contracts with different mechanisms and purposes and separate parties; ii. The FOA was a bilateral sale contract with a price agreed which the purchaser is liable to pay. The JOA on the other hand was a multilateral joint venture contract with a joint venturers’ account. iii. Apache wore different hats at different times, depending on which contract is being considered. iv. To hold otherwise, would be impermissibly to incorporate a joint venture accounting convention in a multilateral joint operating agreement into a bilateral farm-out sale and purchase agreement so as to reduce the price there agreed; v. That would be “a significant development for the oil and gas industry, given that joint operating agreements are attached routinely to farm-out agreements by way of appendix”.
The decision in the Court of Appeal
The Court of Appeal rejected Apache’s arguments and held that the recovery of the drilling costs was capped at market rates given the provisions of the JOA. This was essentially for three reasons identified in the judgment of Carr L.J.
First, the artificiality of trying to construe the FOA as if it stood alone and without reference to the JOA. As the Court stated, this was “an ex post facto theoretical argument that does not reflect the true nature of the parties’ dealings at the time” [39] in circumstances where, by the time that the FOA was executed, the terms of the JOA, including the Accounting Procedure, had been negotiated and by the terms of the FOA they were to be deemed to be in full force and effect before and after completion of the FOA. The two contracts were “part of a package” and fell to be read together. As the Court said at the outset, FOAs do not exist in a vacuum and necessarily need to take account of and interact appropriately with those joint operating agreements to avoid inconsistencies and minimise the prospect of dispute.
Secondly, and building on that, not only was the JOA part of the “Agreement” which made up the FOA (because the JOA was attached by way of schedule to the FOA), but the FOA also contained what the Court described as a “plethora of references throughout the FOA to compliance with the provisions of the JOA” which showed that they were intended to interact with each other.
Thirdly, the argument that the FOA was an entirely separate and self-contained agreement could not sit with the parties’ express agreement for issuing AFEs, invoicing and payment under the FOA “in accordance with the relevant JOA”. The critical factor was that all billing under the FOA was to be done using the JOA accounting procedure and therefore invoicing Euroil for the Earn-In costs was subject, without qualification, to the JOA accounting procedure and the principles set out in it, in particular the ‘fair and equitable’ principle, reflected in market rates, and the ‘no gain no loss’ principle.
Discussion
In one sense, it is difficult to see how the Court could have reached any other conclusion given the express inter-linking of the JOA into the FOA and the use of the JOA provisions for the accounting procedure. Looking at the language of the FOA in isolation, the Court found that Apache’s argument had at least an “initial attraction”. But the decisive factor was the fact that the proper construction of Euroil’s payment obligation fell to be determined on the basis of the text of both the FOA and the JOA, and sense made of each taken together.
The realistic approach of construing multiple contracts used in the energy sector is a continuing one. There are different routes by which the approach can be deployed, for example by treating the other contract or contracts as part of the factual matrix in which the subject contract was made and against which it must be construed, even if not part of the same transaction and even if not directly inter-related (as they were in Apache v Euroil).
The earlier decision of Teesside Gas Transportation v Cats North Sea Ltd [2020] EWCA Civ 503 illustrates this in perhaps an extreme form. In that case, the terms of a cost sharing formula in a Capacity Reservation and Transportation Agreement dated 1990 and relevant to the usage of the pipeline were construed in the light of the concepts found in the later Transportation & Processing Agreements with third party shippers (“TPAs”) were concluded by the CATS Parties and with which it was to be assumed the CRTA was to work in the future. A “separate contracts” / “subsequent contract” argument was rejected by the Court on the basis that “the concepts used in those later contracts (such as “Daily Reserved Capacity Rate”) were within the contemplation of the parties in 1990 even if the names given to them and the detailed terms of the TPAs were not” (per Males LJ at [84]).
Coda: “Precedence Clauses”: any use?
As so often, reliance was placed on a conflicts or inconsistencies precedence clause in the FOA (“If there is any conflict between the provisions [the FOA and the JOA], the provisions of this Agreement shall prevail”). Apache argued that this established that the FOA ‘trumped’ the JOA. Again, as equally so often, the Court emphasised that such clause was only of any utility in the case of true conflict, which would usually not arise once the terms had been construed together and for which, in Carr L.J’s words, it had to be shown that “one clause in one document emasculates another clause in another document”. [36]
