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.

Understanding the Oil Crisis: Why Did Prices Fall Below Zero?

Anyone watching the news last week will have heard about ‘negative’ oil prices and producers paying people to take their oil off their hands – but what exactly does that mean, and how was it caused?

For starters, it’s a case of applying the basic economic principle of supply and demand. There is currently too much oil and nobody wants it. The reason for the latter is easy enough to identify: Covid-19 and the ensuing global shut down. People aren’t leaving their homes, no one’s flying anywhere, bulk products aren’t being shipped across the globe, factories aren’t running. Demand for oil has dried up. Oil production, however, has not, and aside from the obvious explanation of it being very difficult (sometimes impossible) and very expensive to turn off the tap, there are actually several other, complex reasons for why prices fell so drastically:

BAD TIMING AND GLOBAL POLITICS:

Covid-19 hit while global oil production was already high.

As a result of the development of fracking and shale oil in the USA over half a decade ago, there has been a glut of oil permeating the market. This (amongst other reasons) led to a significant downturn in prices in 2016 and as a result, the Saudi led OPEC – a legal cartel which aims to stabilise global oil prices – cooperated with several non-OPEC states (most notably Russia) to co-ordinate production cuts in order to counter the increase in American oil exports, and thus raise oil prices to a more stable, economic level. This alliance (known as OPEC+) fell apart once Covid-19 hit China. The Chinese shut down caused a major drop in the demand for oil and triggered a summit where OPEC agreed to further cut production, requiring also that OPEC+ members follow suit. Russia, however, refused. The official stance was that they wanted to wait for a better understanding of the pandemic before taking action. They also argued that there was already a shortfall as a result of political issues in Libya, which would help to offset the slump in prices.

Many analysts believe that Russia’s unwillingness to cut production was due in large part to it being disgruntled towards the United States, who have been one of the main beneficiaries of the OPEC+ cuts over the past four years (since they have had no such limitations on their production). Political relations between the two states have also not helped matters, especially with Trump’s general propensity for using oil as a political weapon against states and in particular the US sanctions targeting the building of the Russian Nord Stream 2 pipeline.

In retaliation for their lack of cooperation, Saudi Arabia then initiated an unexpected price war against Russia, turning on their taps and causing another massive drop in prices.

Making Sense of the Saudi-Russian Oil War

Meanwhile, producers in the United States kept producing in spite of the slump, even reaching record output highs in March 2020 – this seemed clearly counter-intuitive, not least because the US’ development of shale oil moved it from being one of the world’s largest importers to being the world’s biggest exporter (and thus it benefits far more from higher oil prices). The problem was twofold: one, production costs in the US are generally much higher than those found in rival, Middle Eastern states, and two, many American companies had secured billions of dollars’ worth of debt finance over the past few years to fund their increase in production. They simply could not afford to slow down.

The drop in market price quickly hit so low, however, that US ventures became commercially unfeasible and had no alternative but to begin shutting down operations. As a result, in early April the US, Russia and OPEC agreed to a deal to cut production. This agreement, while historic, seems to have done almost nothing to assure the market in the face of a global shut down – with many considering it too little, too late: there is a substantial amount of excess oil already on the market and even when quarantine restrictions are lifted, it will be some time before demand catches up to match/exceed supply.

A LACK OF STORAGE AND THE MAY FUTURES

At this point it is worth briefly explaining the two main oil grades which are used to set the majority of the world’s crude oil prices: Brent Crude and West Texas Intermediate (WTI). The former sets the prices of approximately two thirds of the global market, but WTI is produced in the US and is the US benchmark. It is this latter one which fell into negative prices – and while both Brent and WTI tend to move in lockstep (with Brent also having dropped to its lowest figures in over two decades) there were additional incidents relating to WTI which exacerbated the situation.

The other thing worth explaining quickly is the concept of a futures contract (often simply referred to as ‘futures’). Futures themselves are standardised, regulated, derivative financial contracts that oblige parties to transact a good at a specified price (‘strike price’) on a future date, with their specifications allowing market participants to trade them uniformly: each oil futures covers 1,000 barrels; dates for delivery are available up to nine years later; and title is officially transferred with the physical movement of the oil. They provide certainty for those who wish to sell or purchase crude physically (and who also need time to actually produce the oil/prepare to receive it), since the parties are able to contract with set, pre-determined prices that will not change based on the naturally volatile market price at the date of delivery (contracting for this purpose is known as ‘hedging’).

On the other hand, traders make a profit (and equally risk suffering losses) through market fluctuations. Some might retain the futures contract until it expires, requiring them to take delivery (these are usually traders who buy/sell for industry-related clients, such as producers or refineries), but most traders have no intention of doing so and instead sell the contracts forward to take advantage of the (hopefully) higher contango prices (i.e. when the price of futures is higher than the spot price) on later-dated contracts.

The vast majority of crude oil transactions take place via futures, but that does not mean the spot market (where trading for large, one-off transactions for near-term delivery takes place) should be underestimated, in fact it is vital: reported prices on the spot market are the basis of pricing for other forms of transaction, including futures. Additionally, as the expiration date of a futures contact approaches, it should become more liquid and the price should quickly begin to converge with the spot price.

The May futures for the WTI market were due to expire (and did) on Tuesday 21 April 2020 (the final day of trading for May). When that happened, whoever was still holding a futures contract would obliged to take physical delivery of the goods. Traders who had initially held off selling futures for this month began to panic as they realised their mistake: when futures are so close to expiration the only interested buyers tend to be companies who might otherwise have purchased oil on the spot market, i.e. they want to take possession of the oil and use it relatively quickly (like airlines, refineries etc.) Due to the glut, the earlier drop in prices and, most significantly, the sudden plunge of demand due to Covid-19 (which also severely weakened the spot market), these kinds of buyers for futures had dried up, and any who were willing to purchase the futures realised that they could take advantage of the situation by waiting until prices fell even further. Exacerbating the situation were the bulk exchange-traded fund rollovers (see below) and a lack of storage space (which continues to be a problem) – most notably in the terminals of Cushing, Oklahoma.

Cushing OK would be a tiny, inconsequential city (population: 8,000), were it not for the fact that it is the delivery point for WTI crude (and thus the pricing point for WTI futures). It is also where several main oil pipelines converge, essentially making it a key transhipment location between producers and refineries in the southern Gulf coast and buyers in the north. At full capacity (its current state) it stores up to 76 million barrels, which is over 10% of all US oil storage space.

Unlike Brent, which is a waterborne crude and does not suffer the same storage constraints (ships, after all, can come and go – to an extent), WTI is mostly onshore, with Cushing itself being a landlocked location in the centre of the United States. With the surplus in oil already filling the terminals there, not only were traders afraid of being forced to take delivery once the futures expired, they also realised they would have nowhere to store any of it (analysts have likened the situation in Cushing to a clogged bottle neck or traffic jam).

Main oil terminals and pipelines in the USA

With the obligation to take delivery looming, those who still had May futures began paying companies to take the oil off their hands. The price they paid was calculated by what the buyers’ projected storage, insurance, transport costs etc. would be to do so. This was ultimately what dropped the WTI benchmark to below zero.

ETFS AND THE UNITED STATES OIL FUND

As the price war between the Saudis and the Russians drove prices low, it was natural to assume that this was an ideal time to invest in oil (based on the premise that crude prices will rise again since economies will, inevitably, have to reopen). This kind of thinking is not necessarily wrong but, as is the case with any financial investment, would-be venture capitalists should always undertake their due diligence before investing their money. Many didn’t and a great number of bullish speculators unfamiliar with the market (colloquially referred to by some as ‘oil tourists’) pumped over one and a half billion dollars into the United States Oil Fund (‘USO’), the largest exchange-traded fund (‘ETF’) in America (typically, ETFs are companies which use pooled investor money – similar in concept to a mutual fund – to invest in stocks, bonds and other assets). The USO ETF is designed specifically to follow price movements of WTI futures and, if futures are within two weeks of expiration, it will roll over the front month contracts to the second front contracts (this means that, when futures approach the expiration date they will be sold and the next month’s contracts purchased, usually simultaneously, thereby avoiding taking delivery). The USO is not a direct bet on oil prices and it incurs costs when it rolls its futures over. Not many of its new investors were aware of any of this.

The massive increase in investment quickly made the USO ETF one of the biggest players in the WTI market: according to a Bloomberg report, over the course of the last few months it held almost 30% of all WTI May and June futures. With such a huge and sudden injection of cash for the May futures (amidst the events which led to a crash in demand for oil) their prices swiftly rose; but then the USO sold all their May futures during their mandated rollover, buying June and July ones instead. When that happened, prices for the May futures dropped and, accordingly, they rose for June and July. Any traders left still holding May contracts suddenly found themselves in a state of trouble (see above) and when the market opened there was a huge differential in spread.

As an interesting side note, one of the companies that suffered unexpectedly from the USO’s actions was the Bank of China, which had pre-set the date to roll over its May WTI futures as the day before expiration (unlike other Chinese banks which had rolled over earlier in April). Specifically it was scheduled for Monday 20 April at 10:00 (ET), which was when the May futures were still trading at US$0, but the lack of demand (and thus liquidity) meant they took losses anyway. It’s unclear how many May futures they had to sell, but they suspended trading the next day and there was a flurry of angry investors on various Chinese social media platforms claiming that as a result of the day’s events they owed the Bank of China money (despite investors being forbidden from borrowing money to buy Bank of China funds). Additionally, Bloomberg reported the Bank’s oil related funds suffered losses of 600 million yuan.

WAS THIS A ONE OFF?

To a certain extent WTI prices dropping to such unprecedented levels was the consequence of a perfect storm of unfortunate events and it is therefore not unreasonable to conclude what happened was a localised, one-off incident. Having said that, until (at the very least) the storage issue is resolved we’re likely to continue seeing massive fluctuations in price. Case in point: S&P Global has instructed its clients to roll over all their WTI June futures into July to avoid What they believe will be a second plunge below zero for this front month. In doing so, June futures have now suffered a drop in prices and at the time of writing, almost 50% of them have been liquidated. July and September prices are more stable, but they will almost certainly fall into the same pattern until the global economy starts moving again, or at least until storage space is opened and the planned international production cuts reduce global supply to meet demand.

One recent idea to help alleviate the US glut – at least from a national perspective – was for the American government to purchase a large amount of the excess oil. It would do so via the Strategic Petroleum Reserve (‘SPR’), which is an inland oil reserve holding the largest supply of petroleum on the planet. The oil is owned and stored by the US government specifically with the aim of reducing disruptions in American supplies (the idea was conceived in the 1970s when the US suffered from an oil embargo resulting from difficulties in US-Arab relations). As and when it is deemed necessary by the President, the stored oil is released at a competitive rate, to avert potential short term crises (petroleum has been released, successfully fulfilling the SPR’s purpose, on a number of occasions in recent history).

The SPR currently has almost 80 million barrels’ worth of spare storage, and considering all oil purchased for the SPR is paid for with taxpayer’s money, it seemed economical to take advantage of the rock bottom prices. The Trump administration instructed the Department of Energy to start purchasing the oil in March 2020, but was made impossible when Congress refused to include funds for them to do so when they passed their most recent stimulus package (with federal funds channelled to areas of higher priority, given the effects of Covid-19 and the resulting shutdown).

Instead the government has decided to lease 23 million barrels’ worth of space to private oil companies. This will certainly help but the other factors remain unresolved, which means this might not be a one-off, but it’s hoped the lesson of what happened with the May futures will at least mitigate some of the volatility.

COULD THIS HAPPEN TO BRENT?

The fact that this happened to the American WTI benchmark, which has arguably less global influence than Brent does, and that the situation was exacerbated by the uniquely acute inland storage issue there, would suggest that this is a concern for the United States only. Brent, however, has already been affected by the fallout from the Covid-19 crisis, but the good news is it’s unlikely its prices will fall to the same extent that they have for WTI.

The Economist explains - What is Brent crude? | The Economist ...

First, Brent futures are somewhat different in that they’re for cash, not physical, settlement, unlike WTI (physical settlement requires physical delivery of the crude once the futures expires, but with a financial settlement contract, the holder is merely either credited/debited the difference between their entry price and the final settlement). Secondly, Brent is a waterborne crude, with its pricing being based heavily on the Dated Brent index, which in turn bases its prices on crude from terminals at various coasts along the North Sea.

Using the North Sea as the primary location for which to base prices has its advantages: production there has been seeing a slow decline over the past few years (although prior to the pandemic, one of the terminals withdrew its plans to shut down for maintenance, which would actually push the North Sea supply to some of its highest levels in nearly a decade). Additionally, the North Sea terminals, unlike those in landlocked Cushing, have the infrastructure to allow for tankers to take delivery of the crude oil (i.e. they can take it away). As a result, Brent hasn’t suffered from the same storage-induced panic felt by the WTI traders in April – although that doesn’t mean it hasn’t suffered at all, there is still a global glut and therefore a storage issue that isn’t likely to improve until the agreed OPEC+ and US production cuts kick in, and even then the effects won’t be felt immediately. In the meantime, there are global reports that oil is being stored in every conceivable space, from the more conventional salt mines and caverns, to disused railcars.

Storage space if filling up fast, everywhere, the North Sea terminals have nowhere near the capacity that Cushing does and things might also be made worse if there were to be a sudden influx of cheaper, American produced ‘Brent-style’ crude flooding into Europe (indeed, why wouldn’t American companies sell to Europe and alleviate their storage issue? And being cheaper than Brent is currently, why would European companies choose not buy it?)

Of course, tanker owners have benefitted from this: the cost of chartering a VLCC has temporarily skyrocketed, with some shipowners set to experience their best quarters in history (which is welcome relief after the Covid-19 shutdown and the ensuing drop in demand for oil caused a massive slump in freight rates). How have companies been able to pay for this? The contango market has meant that oil prices have fallen faster on the spot market than the futures market (see above), in doing so, traders have been able to finance their storage by buying oil on the cheap in the spot market and then make a profit on it by selling it for higher prices in the futures market (for back month contracts).

Things, however, do seem to be looking up for Brent: in the past week prices have begun to rebound as global lockdowns and travel bans have slowly eased, but the fact still remains that the OPEC+ and US deal came too late. The lowest dip in the world’s demand for oil might be behind us, but the surplus is already out there and until the market can find that balance between supply and demand again, prices aren’t going to get much higher. The only saving grace producers – especially smaller and medium sized companies – will have, is to obtain a solid offtake agreement with a company that has a strong credit rating and a sure way of disposing of the oil… good luck getting one of those in this economy.

Climate change and tort. The jurisdictional battlefield in the US.

This blog recently featured a New Zealand decision in a strike out application in a climate change tort suit. Similar claims have also been a feature of litigation in the State courts in the US in the last few years. Why not in the federal courts? The reason goes back to two previous decisions: 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.

So, various municipalities have decided to sue in the State courts, claiming damages for what they estimate they will have to spend to mitigate the effects of climate change in future years. The oil majors who have been on the receiving end of these suits have sought removal of the cases to the Federal courts, where they will be dismissed. So far, the position on this is mixed.

The claims by the Cities of New York and Oakland saw their State law claims transferred to the Federal courts because of the interstate nature of the claims. Once there, Oakland sought, unsuccessfully, to distinguish Kivalina and AEP on the grounds that those decisions involved emissions directly from activities of the defendants, rather than by virtue of their sales of fossil fuels to third parties who then burn it and cause GHG emissions. This was not enough to distinguish the cases, and a further attempt, based on the effect of worldwide sales outside the reach of the Environmental Protection Agency and the Clean Air Act, also failed, running into the presumption against extraterritoriality. A further reason for dismissing the claims was that they implicated the interests of foreign and domestic governments and that the balancing of interests involved in the analysis of unreasonable interference in a public nuisance suit was best left to governments. New York has appealed the decision, as has Oakland.

By contrast, Baltimore’s tort claims in the State Court of Maryland have managed to stay there. The claims were not based on federal common law and the Clean Air Act did not show congressional intent for it to provide the exclusive cause of action, and indeed the Act contains a savings clause specifically preserving other causes of action. The Defendants then unsuccessfully applied to the Supreme Court for a stay, pending the hearing of their appeal.

On 6 March 2020 the Fourth Circuit declined to transfer the claims to the Federal Courts. They decided that the appeal was limited under 28 U.S.C. § 1447(d) to an appeal based on the Federal Officer Removal statute, one of the eight grounds for transfer argued by the Defendants in the District Court. The Statute,  U.S.C. § 1442, authorizes the removal of cases commenced in state court against “any officer (or any person acting under that officer) of the United States or of any agency thereof, in an official or individual capacity, for or relating to any act under color of such office…”  The Defendants argued that the statute applied because the City “bases liability on activities undertaken at the direction of the federal government”, pointing to three contractual relationships between certain Defendants and the federal government: (1) fuel supply agreements between one Defendant (Citgo) and the Navy Exchange Service Command (“NEXCOM”) from 1988 to 2012; (2) oil and gas leases administered by the Secretary of the Interior under the OCSLA; and (3) a 1944 unit agreement between the predecessor of another Defendant (Chevron) and the U.S. Navy for the joint operation of a strategic petroleum reserve in California known as the Elk Hills Reserve.

The Fourth Circuit held that none of these relationships could justify removal, either because they failed to satisfy the acting-under prong or because they were insufficiently related to Baltimore’s claims for purposes of the nexus prong.

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.

In another suit, by San Mateo, the Defendants have appealed against the District Court’s decision not to transfer the suit from the California State Court. The appeal was consolidated with Oakland’s appeal. On 5 February 2020 the Ninth Circuit heard oral argument. They were later informed of subsequent developments in the Baltimore case.

A further success for the municipalities was in the Rhode Island suit, now subject to an appeal to the First Circuit.

It is, therefore, possible that at least one of these tort suits will see the light of trial in the next year or so. When that happens, expect some interesting arguments on causation and damages.

England v Spain grudge match. Appeal against registration of ‘Prestige’ judgment against London Club likely to be heard in December 2020.

 

Following the break up of ‘The Prestige’, Spain brought proceedings for compensation for the resulting pollution against various defendants, including the owner’s P&I Club. The Club got its response in early by obtaining an arbitration award against Spain which declared that, as a result of the “pay to be paid” clause in the policy the Club had no liability to Spain. The arbitrator’s jurisdiction was challenged unsuccessfully in the English Courts and the award was converted into a judgment. London SS Mutual v Kingdom of Spain, [2015] EWCA Civ 333; [2015] 2 Lloyd’s Rep. 33

In 2016 the Spanish Supreme Court held that the owners and their club were liable for the damage caused and in execution proceedings in La Coruna the court held that the club would liable in respect of the claims up to a global limit of liability in the sum of approximately €855 million. Spain has obtained an order in England registering the Spanish judgment to enable its enforcement here in England. The Club have appealed against that order, principally on the ground that, under art 34.3 of the Brussels Regulation the judgment is irreconcilable with the previous decisions of the English courts converting the award into a judgment.

In a Case Management Conference before Teare J [2020] EWHC 142 (Comm) it was ordered that the trial be after 1 December 2020. It is estimated that it will last 5-6 days. Disclosure has been ordered of documents held by Spain which relate to the alleged refusal of the Spanish Courts  to allow the master to participate in an underwater investigation of the strength of the vessel’s hull and to disclose the results of the investigation (so that there was a breach of the master’s right to equality of arms and to be able to prepare a defence) or whether the results were disclosed to the master in sufficient time to allow him to prepare his defence.

The Club were also given permission to adduce evidence of a naval architect on the question whether the results of the underwater inspections enabled conclusions to be drawn as to the strength of the hull and if so what those conclusions were. On both issues the Club is to provide its evidence first.

A tale of targets. Dutch Supreme Court decides on climate change and State’s duty to protect its citizens.

 

 

A new feature of the legal landscape is climate change litigation – be it tort claims against carbon majors in the US, investor fraud allegations in the US, and public law challenges in Europe. The last of these yielded an interesting decision just before Christmas when the Dutch Supreme Court gave its decision in the Urgenda case, reported in this blog on 25 October 2018, upholding the judgments of the lower courts that the Dutch State must reduce GHG emissions by 25% over 1990 levels by the end of 2020.

 

The Dutch Supreme Court has summarised its decision as follows (an English translation of its judgment is not yet available).

 

  • The Supreme Court based its judgment on the UN Climate Convention and on the Dutch State’s legal duties to protect the life and well-being of citizens in the Netherlands, which obligations are laid down in the European Convention for the Protection of Human Rights and Fundamental Freedoms (the ECHR).
  • There is a large degree of consensus in the scientific and international community on the urgent need for developed countries to reduce greenhouse gas emissions by at least 25% by the end of 2020. The Dutch State has not explained why a lower reduction would be justified and could still lead, on time, to the final target accepted by the Dutch State.
  • The Dutch State has argued that it is up to politicians to decide on the reduction of greenhouse gas emissions. According to the Supreme Court, however, the Dutch Constitution requires the Dutch courts to apply the provisions of the ECHR. This role of the courts to offer legal protection is an essential element of a democracy under the rule of law. The courts are responsible for guarding the limits of the law. That is what the Court of Appeal has done in this case, according to the Supreme Court.
  • Therefore, the Supreme Court ruled that the Court of Appeal was allowed and could decide that the Dutch State is obliged to achieve the 25% reduction by the end of 2020, on account of the risk of dangerous climate change that could also have a serious impact on the rights to life and well-being of residents of the Netherlands.

The decision is the first successful climate change challenge to a government’s targets for reducing GHG emissions. In May 2019 a challenge to the EU’s targets of a 40% reduction by 2030 over 1990 levels in Carvalho v European Parliament and Council of EU, Case T-330/18 failed, and a similar challenge to the UK’s targets under the Climate Change Act 2008 in the Plan B case, reported here on 3 September 2018, also failed.

 

€1.57 Billion to Spain and France in Compensation for Prestige Oil Spill

The 1976 tanker Prestige, which broke up and sank after she was refused entry to a harbour of refuge in November 2002, resulted in one of the worst environmental disasters in European history, polluting nearly 2,000 miles of French, Spanish and Portuguese coastline and wildlife, and adversely affecting the fishing industry.

It’s been a long saga, but today the Spanish Supreme Court upheld a decision handed down by the Provincial Court of A Coruña in November 2017 which requires The London P&I Club and the Prestige‘s Captain Apostolos Ioannis Mangouras to pay nearly €1.6 billion in damages to the Spanish government.

France is also set to receive €65 million and Xunta de Galicia €1.8 million.

Must do better. Dutch Court of Appeal’s verdict on the Netherlands State’s efforts on climate change.

 

 

An interesting contrast to the UK climate change case in Plan B recently noted in this blog. On 9 Oct, the day after the IPCC released its report setting out why global warming must not exceed 1.5 C over pre industrial levels, and how challenging achieving that is going to be, the Amsterdam Court of Appeal gave its decision in State of Netherlands v Urgenda Foundation, (Case number : 200.178.245/01 – English translation available at ). Urgenda had brought a class action seeking an order that that the Netherlands State be ordered to achieve a reduction so that the cumulative volume of Netherlands greenhouse gas emissions would be reduced by 40%, or at least by 25%, by end-2020, relative to 1990 levels. The Netherlands had initially set a 30% relative target but after 2011 the target was reduced to 20% to align it with the EU’s target in the Emissions Trading Scheme Directive 2003/87, as subsequently amended.

 

The District Court ordered the State to reduce to 25% . The Court of Appeal has now rejected the State’s appeal. The State had acted unlawfully under Book 6 Section162 of the Dutch Civil Code and also under two articles of the ECHR, which has direct affect in the Netherlands: article 2 which sets out the right to life and also under art 8. Class actions could not be brought before the Court in Strasbourg, but could be brought before the Dutch Courts. Although the 25% target exceeded the EU’s 20% target the State was not precluded from taking more ambitious measures, providing this did not interfere with the EU’s ETS system, which it would not. Of particular interest is the Court of Appeal’s reference to the role of negative emissions technologies in combatting global warming.

 

[49] In the report of the European Academies Science Advisory Council (‘Negative emission technologies: What role in meeting Paris Agreement targets?’), entered into evidence by Urgenda as Exhibit 164, the following is noted about negative emissions:
“(…)We conclude that these technologies [Court: negative emission technologies, or NETs] offer only limited realistic potential to remove carbon from the atmosphere and not at the scale envisaged in some climate scenarios (…)” (p. 1)“Figure 1 shows not only the dramatic reductions required, but also that there remains the challenge of reducing sources that are particularly difficult to avoid (these include air and marine transport, and continued emissions from agriculture). Many scenarios to achieve Paris Agreement targets have thus had to hypothesise that there will be future technologies which are capable of removing CO2 from the atmosphere.” (p. 5)
(…) the inclusion of CDR [Court: removal of CO2 from the atmosphere] in scenarios is merely a projection of what would happen if such technologies existed. It does not imply that such technologies would either be available, or would work at the levels assumed in the scenario calculations. As such, it is easy to misinterpret these scenarios as including some judgment on the likelihood of such technologies being available in the future.” (p. 5)
The State has failed to contest this by not providing adequate substantiation. Therefore, the Court assumes that the option to remove CO2 from the atmosphere with certain technologies in the future is highly uncertain and that the climate scenarios based on such technologies are not very realistic considering the current state of affairs.

 

In the UK Plan B decision the Court referred to the Committee on Climate Change’s view that the UK’s planned reduction would be challenging but would be accelerated after 2030 by, inter alia, carbon capture. Plan B have lodged an appeal against the court’s refusal to grant judicial review. The reference to the challenge of reducing greenhouse gas emissions from marine transport is also interesting in the light of what is currently happening in the IMO, as noted in our blog.

Who is an “operator” under OPA 1990? Dumb barges and dumb tug.

 

Who is an “operator” under OPA 1990? Dumb barges and dumb tug.

 

In January 2013, a tugboat owned by Nature’s Way was moving two oil-carrying barges owned by Third Coast Towing down the Mississippi River. The barges were “dumb” barges lacking the ability for self-propulsion or navigation. The barges collided with a bridge, resulting in one of the barges discharging over 7,000 gallons of oil into the Mississippi. Nature’s Way and its insurer, and Third Coast Towing and its insurer were all designated by the Coast Guard as “responsible parties” under the 1990 Oil Pollution Act (‘OPA’). Nature’s Way subsequently spent over $2.99 million on the clean-up, and various governmental entities spent over an additional $792,000. In May 2015, Nature’s Way submitted a claim to the National Pollution Funds Center (NPFC) seeking reimbursement of over $2.13 million on the grounds that its liability should be limited by the tonnage of the tugboat and not the tonnage of the barges and also claiming relief from any obligation to reimburse the government for the additional $792,000-plus. Those claims were denied by the NPFC based upon its determination that Nature’s Way was an “operator” of the oil-discharging barge at the time of the collision.

 

The District Court held that Nature’s Way was an “operator” and its decision has been upheld by the Court of Appeals for the Fifth Circuit in US v Nature’s Way 21 Sept 2018. Case: 17-60698. OPA does not define the term “operator” but the Supreme Court in United States v. Bestfoods, 524 U.S. 51, 66 (1998) analysed the definition of the term in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), as follows:

In a mechanical sense, to “operate” ordinarily means “[t]o control the functioning of; run: operate a sewing machine.” American Heritage Dictionary 1268 (3d ed. 1992); see also Webster’s New International Dictionary 1707 (2d ed. 1958) (“to work; as, to operate a machine”). And in the organizational sense more obviously intended by CERCLA, the word ordinarily means “[t]o conduct the affairs of; manage: operate a business.”

 

Applying that analysis, the ordinary and natural meaning of an “operator” of a vessel under the OPA would include someone who directs, manages, or conducts the affairs of the vessel, and would thereby include the act of piloting or moving the vessel. Nature’s Way undisputedly had exclusive navigational control over the barge at the time of the collision, and, as such, it was a party whose direction (or lack thereof) caused the barge to collide with the bridge. It was, therefore, “operating” the barge at the time of the collision based on the ordinary and natural meaning of the term.

 

The Fifth Circuit rejected Nature’s Way’s argument that its conduct in moving the barge was more akin to the “mere mechanical activation of pumps,” and it could not be deemed to have been “operating” the barge because it was merely moving the barge as per Third Coast’s directions, and it did not exercise control over its environmental affairs or inspections.

Nature’s Way directed precisely the activity that caused the pollution—it literally was the party that crashed the barge into the bridge. It was clearly “operating” the barge at the time of the collision and therefore constituted a “responsible party” under OPA.