Another bad week for Shell. Supreme Court allows Okpabi appeal

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.

Things don’t go well for Shell. Dutch Court of Appeal finds it liable for pipeline spills in Nigeria

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.

Upstream gas sales: of capacities and counterfactuals

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.

Climate change reduction and the IMO. What to expect from this week’s MEPC meeting.

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.

Norway’s ‘Urgenda’ moment? Greenpeace Nordic Ass’n v. Ministry of Petroleum and Energy

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.

Baltimore Climate Change litigation in State Courts. Supreme Court to wade in.

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.

We shall see.

Farm-Out Agreements and JOAs: a Joined-Up Approach to Construction

OVERVIEW

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]

International Shipping gets closer to the rocks of the EU Emissions Trading System

Earlier this year this blog reported on the implications for international shipping of the EU ‘Green Deal’, the topic of two papers at the IISTL’s recent Colloquium.

Things are now moving on apace. On 16 September the European Parliament voted in favour of a 40% reduction in CO2 by 2030 for all maritime transport and for the inclusion of ships of 5000 grt and over in the EU Emissions Trading System (ETS), with the establishment of an “Ocean Fund” to run from 2022 -2030 to contribute to protecting marine ecosystems. The Parliament is now ready to start negotiations with member states on the final shape of the legislation.

Where the EU goes, the IMO may follow – on which note in another interesting development, on 25 September, the major charterer, Trafigura, have submitted a proposal to the IMO for a partial “feebate” system to decarbonise global shipping. Trafigura’s press release states, “We propose a self-financing system where a levy is charged on the use of fuels with a CO2-equivalent intensity above an agreed benchmark level, and a subsidy is provided for fuels with a CO2-equivalent profile below that level. It is now time to put a price on carbon emissions in the shipping industry Our own in-depth analysis and commissioned independent research indicates that the levy should be between $250-$300 per tonne of CO2-equivalent. While primarily bridging the cost gap between carbon intensive and low or zero carbon fuels, this partial “feebate” would also raise billions of dollars for research into alternative fuels and could help assist small island developing states and other developing countries mitigate the impact of climate change.”

Rather more than the $2 per tonne bunker levy for financing R&D into alternative green fuels that various shipowner organisations proposed earlier this year.

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Double-bad news for Mauritius. It’s the wrong type of pollutant.

 

On July 26 the “Wakashio” grounded off Mauritius, breaking up on 16 August. So far about 1200 tonnes of bunker fuel has been released into the sea. For Mauritius this is an environmental disaster.

Civil liability for bunker oil pollution falls under the Bunker Oil Pollution Convention 2001, to which Mauritius is a party. The good news is that under the Convention, the shipowner is strictly liable and there is mandatory insurance, with a direct right of action against the liability insurance, in this case the Japan P&I Club.

The bad news is that art. 6 provides that owners may limit their liability in accordance with the Convention for Limitation of Liability for Maritime Claims 1976 or as amended.

The 1996 Protocol, significantly increases the  original limits in the 1976 Limitation Convention. However, it seems that Mauritius has not signed up to the 1996 Protocol.

Based on the gross tonnage of the vessel, apparently 101,932 tonnes, the limit for third-party claims including costs of prevention and clean up would be around $18m. Under the 1996 Protocol the limit would be $65m, based on the 2012 amendment to the LLMC 1996 limits, which entered into force in June 2015 and applied automatically unless objected to.

Had the oil spilled been from a laden oil tanker, the CLC and Fund regimes would have kicked in, with substantially higher limitation figures. Under the CLC the shipowner’s limitation figure would be around 65 million SDR,  US $91.65 million, with the Fund’s limitation figure being 203 million SDR, US $ 324.3 million.

 

Intransigent defendants: Prestige 4.0

Most parties who lose English court cases or arbitrations give in (relatively) gracefully. In the long and ongoing Prestige saga, however (already well documented in this blog: see here, here, here, and here), the French and Spanish governments have chosen to fight tooth and nail, something that is always apt to give rise to interesting legal points. Last Friday’s episode before Butcher J (SS Mutual v Spain [2020] EWHC 1920 (Comm)) was no exception, though in the event nothing particularly novel in the way of law emerged.

To recap, nearly twenty years ago the laden tanker Prestige sank off northern Spain, grievously polluting the French and Spanish coasts. Steamship Mutual, the vessel’s P&I Club, accepted that it might be potentially liable to direct suit up to the CLC limit, but pointed out that its cover was governed by English law, contained a “pay to be paid” clause and required arbitration in London. Nothing daunted, the French and Spanish governments came in as parties civiles when the owners and master were prosecuted in Spain, and claimed their full losses. The Club meanwhile protected its position by obtaining declaratory arbitration awards in England against both governments that all claims against it had to be arbitrated here; for good measure it then successfully transmuted these awards into High Court judgments under s.66 of the 1996 Arbitration Act (see The Prestige (No 2) [2013] EWHC 3188 (Comm). These decisions the French and Spanish governments blithely ignored, however; instead they took proceedings in Spain to execute the judgments they had obtained there.

In the present litigation, the Club’s claim (slightly simplified) was against both governments for damages for continuing the Spanish proceedings, based either on breach of the arbitration agreement, or in the alternative on failure to act in accordance with the s.66 judgments. The object, unsurprisingly, was to establish an equal and opposite liability to meet any claim asserted by the governments under their judgments in the Spanish proceedings.

The Club sought service out on the French and Spanish governments: the latter resisted, arguing that they were entitled to state immunity, and that in any case the court had no jurisdiction.

On the state immunity point, the Club succeeded in defeating the governments’ arguments. The proceedings for breach of the arbitration agreement were covered by the exception in s.9 of the State Immunity Act 1978 as actions “related to” an arbitration agreement binding on the governments. Importantly, Butcher J regarded it as unimportant that the proceedings did not relate to the substantive matter agreed to be arbitrated, and that the governments might be bound not by direct agreement but only in equity on the basis that they were third parties asserting rights arising from a contract containing an arbitration clause.

The proceedings on the judgments, by contrast, were not “related to” the arbitration agreement under s.9: understandably so, since they were based on failure to give effect to a judgment, the connection to arbitration being merely a background issue. But no matter: they were covered by another exception, that in s.3(1)(a), on the basis that the breach alleged – suing in the teeth of an English judgment that they had no right to do so – was undoubtedly a “commercial transaction” as defined by that section.

The judge declined to decide on a further argument now moot: namely, whether suing abroad in breach of an English arbitration agreement was a breach of a contractual obligation to be performed in England within the exception contained in s.3(1)(b) of the 1978 Act. But the betting, in the view of this blog, must be that that exception would have been inapplicable: there is a big and entirely logical difference between a duty not to do something other than in England, and an obligation actually to do (or omit to do) something in England, which is what s.3(1)(b) requires.

State immunity disposed of, did the court have jurisdiction over these two governments? Here the holding was yes, but only partly. The claim based on the s.66 judgments was, it was held, subject not only to the Brussels I Recast Regulation but to its very restrictive insurance provisions dealing with claims against injured parties (even, note, where the claims were being brought, as some were in the case of Spain, under rights of subrogation). Since the governments of France and Spain were ex hypothesi not domiciled in England, but in their respective realms, there could be no jurisdiction against them.

On the other hand, the claims based on the obligations stemming from the arbitration award were, it was held, within the arbitration exception to Brussels I, and thus outside it and subject to the national rules in CPR, PD6B. The only serious question, given that the arbitration gateway under PD6B 3.1(10) or the “contract governed by English law” gateway under PD6B 3.1(6)(c) pretty clearly applied, was whether there was a serious issue to be tried as to liability in damages. Here Butcher J had no doubt that there was, even if the governments were not directly party to the agreements and the awards had been technically merely declaratory of the Club’s rights. It followed that service out should be allowed in respect of the award claims.

Further than this his Lordship did not go, for the very good reason that he had no need to. But in our view the better position is that indeed there would in principle be liability under the award claims. If, as is now clear, an injunction is available on equitable grounds to prevent suit in the teeth of an arbitration clause by a third party despite the lack of any direct agreement by the latter, there seems no reason why there should not also be an ability to an award of damages, if only under Lord Cairns’s Act (now the Senior Courts Act 1981, s.50). Further, there seems no reason why there should not be a an implied obligation not to ignore even a declaratory award by suing in circumstances where it has declared suit barred.

For final answers to these questions we shall have to await another decision. Such a decision might even indeed come in the present proceedings, if the intransigence of the French and Spanish governments continues.

One other point to note. The UK may be finally extricating itself from the toils of the EU at the end of this year. But that won’t mark the end of this saga. Nor indeed will it mark the end of the Brussels regime on jurisdiction, since the smart money is on Brussels I being replaced with the Lugano Convention, which is in fairly similar terms. You can’t throw away your EU law notes quite yet.