Category: Oil and Gas Law

Climate Change litigation update (2). The UK.

So far, 2023 has seen three claims in the English courts involving the treatment of scope 3 greenhouse gas (GHG) emissions, two involving judicial review, and one involving a derivative action against the board of directors of Shell. Scope 1 concerns direct emissions from sources that are fully or partly owned or controlled by the organisation (such as a refinery). Scope 2 is for indirect emissions from third-party sources from which the organisation has purchased or acquired electricity, steam, or heating for its operations. Scope 3 includes all other indirect emissions resulting from activities of the organisation, but occurring from greenhouse gas sources owned or controlled by third parties such as other organisations or consumers, including emissions from the use of third-party purchased crude oil and gas. 

1. R (Friends of the Earth Limited) v. The Secretary of State for InternationalTrade/UK Export Finance [2023] EWCA Civ 14 

The main issue before the Court of Appeal was whether the UK Government acted unlawfully in deciding to approve UKEF’s £1.15 billion investment in a liquified natural gas project in Mozambique. UKEF’s final climate change report on the project (the CCR) concluded after a detailed analysis that “[g]as from the [project] is … considered by the Government of Mozambique to be an important contributor to the energy transition of Mozambique in line with its NDC [nationally determined contribution] and its Paris Agreement commitments” and that “[t]his aligns with the UK Government’s commitment to support developing countries to respond to the challenges and opportunities of climate change as part of its own Paris Agreement obligations”. The CCR concluded that the project’s Scope 3 emissions would significantly exceed its Scope 1 and Scope 2 emissions. The case involved three issues:

i) Was the UK Government required to adopt the correct, rather than merely a tenable, meaning of the Paris Agreement?

ii) Had the UK Government behaved irrationally in concluding that the decision was compatible with article 2(1)(c) of the Paris Agreement?

iii) Had the UK Government breached its duty of enquiry by failing to quantify the project’s Scope 3 emissions? These are all indirect emissions from the gas extracted by a project not included in Scope 1 (direct emissions) and Scope 2 (indirect emissions from the generation of purchased electricity).

On the first two issues the Court of Appeal found that the Paris Agreement was pre-eminently an unincorporated international treaty that did not give rise to domestic legal obligations. The respondents here chose, but were not compelled by domestic law, to take into account the UK’s obligations under an unincorporated treaty. The question of whether funding the project was aligned with the UK’s international obligations under the Paris Agreement was accepted to be justiciable. The Paris Agreement was, however, only one of a range of factors to which the respondents decided to have regard in reaching the decision.

The Court held that there had been no error of law in that it was tenable for UKEF to reach the view that funding the project was aligned with the UK’s obligations under the Paris Agreement. Article 2(1)(c) contains the aims and purposes of the Paris Agreement, including “holding the increase in the global average temperature” and “making finance flows consistent with a pathway towards low greenhouse gas emissions”. However, it did not create an obligation on the UK to demonstrate that its overseas funding was was consistent with a pathway towards limiting global warming to well below 2°C and pursuing efforts to 1.5°C. The CCR’s view was that on balance it appeared more likely than not that, over its operational life, the gas from the Project would at least replace some and/or displace some more polluting fuels, leading to some net emissions reduction. Therefore, it could not possibly have been irrational for the respondents to decide to provide finance for the project, when they were being advised that the project could, in some scenarios, align with the UK’s obligations under the Paris Agreement. That was at least a tenable view.

On the third issue the Court of Appeal held that the UK Government  had not breached its duty  of inquiry because it was not possible to say that it was irrational to take the funding decision without quantifying the Scope 3 emissions. UKEF’s decisions as to the quantification of the Scope 3 emissions and the adequacy of the Climate Change Report it had obtained were well within the substantial margin of appreciation allowed to the decision-makers.

2. Greenpeace Ltd v (1) Secretary of State for Business, Energy and Industrial Strategy and (2) the Oil and Gas Authority; and Uplift v (1) SSBEIS and (2) the OGA (North Sea oil and gas licensing)

In October 2022 the NSTA, pursuant to its powers under Part 1 of the Petroleum Act 1998, launched the 33rd Offshore Oil and Gas Licensing Round. This is expected to result in the grant of a further 100 licences. In December 2022 separate claims for judicial review were launched by environmental charities Greenpeace and Uplift. In April 2023 both claims were granted permission to proceed to trial.  Both challenges include arguments on the assessment of end-use emissions, i.e. from when the oil and gas is ultimately used, for example in fuelling cars.

The challenges will potentially be impacted by outcome of the appeal in R (Finch on behalf of the Weald Action Group & Others) v. Surrey County Council (& Others) which the Supreme Court will hear on 21 June 2023. In 2019 Surrey County Council’s granted planning permission to Horse Hill Developments Limited to expand an existing site to add four new wells for the production of crude oil hydrocarbons over a 20 year period. The developer’s environmental statement provided an assessment of the direct (scope 1 and 2) greenhouse gas (GHG) emissions associated with the project but not its scope3 emissions, those  would subsequently be produced as a result of using the product.  The claimant argued that SCC’s failure to consider these emissions in determining whether to approve the project was a breach of the UK’s obligations under European Union Law (Directive 2011/92/EU, the EIA Directive) as implemented in domestic law by the EIA Regulations, and also that scope 3 emissions should have been considered in relation to the UK’s net zero target.  At the end of 2020 the High Court dismissed the case on the basis that the assessment of scope 3 emissions was as a matter of law incapable of failing with the scope of the EIA. In February 2020 the Court of Appeal by a 2-1 majority upheld the dismissal, finding that the decision maker had a discretion whether or not to include scope 3 emissions in the EIA.

3. ClientEarth v Shell Plc and others [2023] EWHC 1137 (Ch))

On February 9, 2023, ClientEarth filed a derivative action against Shell’s Board of Directors alleging mismanaging of material and foreseeable climate risk and breach of company law. The claim alleged that Shell’s 11 directors had breached their legal duties under the Companies Act by failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement. Shell claims that its “Energy Transition Strategy,” which includes a net zero emissions plan with a 2050 target, is consistent with the 1.5°C temperature goal of the Paris Agreement. ClientEarth, based on a third-party assessment done by Climate Action 100+, claims that the strategy excludes short to medium-term targets to cut the emissions from scope 3 emissions despite these accounting for more than 90% of the company’s overall emissions.

The High Court has now refused ClientEarth permission to bring a derivative action against Shell’s directors, and found that ClientEarth had not demonstrated a prima facie case that either Shell’s directors had breached their duty of care to the company or the remedy sought from the court – mandatory injunctions specifying actions to be taken by the directors – would serve a useful purpose. It was for the company’s directors, acting in good faith, to determine how best to promote the success of a company for the benefit of its members as a whole. A court would not generally look behind this unless there is a prima facie case that the directors could not reasonably have determined that their decision was in the best interests of the company as a whole.

Coming soon to the UK Supreme Court, and not coming.

UKSC 2022/0009 Herculito Maritime Ltd and others (Respondents) v Gunvor International BV and others (Appellants) “The Polar”      

What is the proper interpretation of a charter agreement and bills of landing (sic) for a vessel, in respect of losses arising out the seizure of the vessel by pirates.

The Court of Appeal decision in December 2021 is noted here. https://iistl.blog/category/admiralty-law-2/general-average/

UKSC 2022/0064       R (on the application of Finch on behalf of the Weald Action Group) (Appellant) v Surrey County Council and others (Respondents)    

Under Directive 2011/92 EU of the European Parliament and of the Council and the Town and Country Planning (Environmental Impact Assessment) Regulations 2017, was it unlawful for the Council not to require the environmental impact assessment for a project of crude oil extraction for commercial purposes to include an assessment of the impacts of downstream greenhouse gas emissions resulting from the eventual use of the refined products of the extracted oil?

Hearing on 21 June 2023

The case raises similar issues on scope 3 emissions to that in Greenpeace Ltd v (1) Secretary of State for Business, Energy and Industrial Strategy and (2) the Oil and Gas Authority; and Uplift v (1) SSBEIS and (2) the OGA (North Sea oil and gas licensing)

On 26 April 2023 permission was granted to proceed with a Judicial Review of the Government’s decision to launch a new licensing oil and gas round, without taking into account the environmental effects of consuming the oil and gas to be extracted. In the new licensing round fossil fuel companies have submitted submitting more than 100 licences to explore for new oil and gas.

And not coming,

The hearing was fixed for 19/20 June but it was announced earlier this week that the case has now settled. https://www.quadrantchambers.com/news/settlement-reached-eternal-bliss

UKSC 2021/0231       Priminds Shipping (HK) Co Ltd (Respondent) v K Line PTE Ltd (Appellant) The Eternal Bliss    

Whether the Charterers are liable to compensate or indemnify the Owners for the cost of settling the cargo claim by way of (a) damages for the Charterers’ breach of contract in not completing discharge within the permitted laytime; and/or (b) an indemnity in respect of the consequences of complying with the Charterers’ orders to load, carry and discharge the cargo.

The answer given by the Court of Appeal was ‘no’. This is now definitive.

Changes to the latest version of AIEN’s Model Joint Operating Agreement

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.

Canada asks: can a shipowner claim costs and expenses when they caused the oil pollution and were the only ship involved? (Spoiler alert: no)

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, or 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; 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 Prestige, 20 years on. CJEU reference may be withdrawn at last gasp.

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.

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.