Legal update for energy lawyers - October 2020
Energy & Natural Resources
This newsletter provides general information and is not intended to be comprehensive or to provide specific legal advice. Professional advice appropriate to a specific situation should always be sought.
Contracts sometimes provide for 'performance relief' - the right of a party to perform its obligations on a different basis, or stop performing them altogether, in certain situations. This is useful when performance is dependent on the supply of goods from a certain source, for example, or at a certain price. However, the circumstances in which the relief can be claimed are not always clear. The Privy Council has ruled in Delta Petroleum v BVI Electricity Corp that it can be claimed even where the party concerned has continued performing its obligations for an interim period, and it is not necessary to elect between continuing to perform or claiming relief for performance. This contrasts with termination of a contract, where an election needs to be made. In this case, Delta had contracted to provide BVI Electricity with fuel, and the contract provided that it could claim relief from performance if the refinery supplying the fuel closed. After the closure of the refinery, Delta continued to perform by securing fuel from an alternative source. However, this was not sustainable without BVI Electricity paying more for the fuel to offset Delta's increased costs. When Delta requested performance relief, BVI Electricity refused, on the basis that the option had been exhausted. The Privy Council held that the courses of action were not mutually exclusive, and that Delta was able to claim performance relief, but was liable to make payment of liquidated damages for failure to maintain the agreed fuel levels.
In Primus International Holding Co v Triumph Controls UK Ltd, the Court of Appeal has reminded parties of the normal meaning of goodwill and the need to define this (or any other) term carefully if it is to be given an unusual meaning in a contract. In this case, the buyer of a company claimed under a warranty for loss caused by the seller's unreliable financial forecasts. These had resulted in the buyer paying too much for the company. The seller attempted to rely on a clause excluding liability for warranty claims in respect of lost goodwill, arguing that goodwill referred to an intangible asset recorded when a company acquires another company and the purchase price is greater than the sum of the fair value of the identifiable tangible and intangible assets acquired. The Court of Appeal rejected this argument. Goodwill is normally understood to cover the good name, business reputation and connections of a company. If the seller had wanted to give the term a broader meaning, it should have made that clear in the contract.
We reported previously on the Sevilleja v Marex Financial Ltd case, in which the English Supreme Court limited the reflective loss principle. The basic principle of reflective loss is that where a company suffers a wrong, only the company may sue for damages, not its shareholders. The Supreme Court held that a company's creditors (including shareholders acting as creditors) are not precluded from bringing claims by the reflective loss principle. In Broadcasting Investment Group Ltd v Adam Smith, the newly defined principle was tested by a defendant (the alleged wrongdoer) who applied for the claimants' case to be struck out on the basis that they were shareholders in the relevant company and were claiming as such. The defendant succeeded against one claimant, but not against another, who was a 'third degree shareholder' (i.e. a shareholder in a shareholder in a shareholder) rather than owning directly a share in the company. The case illustrates the courts' desire now to restrict the reflective loss principle to the narrow circumstances outlined in the Supreme Court judgment.
Insolvency law in England and Wales has become more debtor-friendly recently with the introduction of the Corporate Insolvency and Governance Act 2020. This has introduced new procedures and other changes to help ailing companies through the pandemic and the economic aftermath in the years to come. The 2020 Act came into force on 26 June, but contains a number of temporary measures that were initially due to expire on 30 September. This date has now been extended. In most cases the measures will end on 30 March 2021, but some (concerning winding-up provisions and meetings) will end on 30 or 31 December 2021, although all these dates could be revised again. For more on the 2020 act, see our article on Debt recovery and creditor enforcement rights during COVID-19.
The English High Court has decided that a first instance decision to stay a winding up petition should be upheld because the debt in question was disputed and subject to an arbitration agreement. In Telnic Ltd v Knipp Medien und Kommunikation GmbH, the court confirmed that where a debt is covered by an arbitration agreement, an insolvency judge should not "conduct a summary judgment type analysis of liability" except in "wholly exceptional circumstances". Those did not exist here, despite the debtor having allegedly admitted the debt in open correspondence. This seems a surprisingly lenient decision from the debtor's point of view, but is based partly on the public policy of upholding the Arbitration Act 1996 and arbitration agreements generally. If the courts took a different approach, parties could use insolvency procedures as a way of frustrating those agreements.
In Riverrock Securities Ltd v International Bank of St Petersburg (Joint Stock Company) the English Commercial Court issued an anti-suit injunction restraining court proceedings in Russia, despite objections that the dispute was not suitable for arbitration. Although the dispute related to an insolvency, the court held that the liquidators' claims in this case were brought on behalf of the insolvent company, were contractual in nature, and were therefore arbitrable as a matter of English law. This meant that they fell within the scope of the parties' arbitration agreement (which specified LCIA rules and a London seat) even though the case had been brought by the liquidator under Russian insolvency legislation. The case is a reminder of the difficulty of deciding which claims are arbitrable in different legal contexts. There is no uniform approach to this at the international level.
A worldwide freezing order can only be enforced outside England and Wales with the permission of the court, and this is usually given in a targeted way, allowing enforcement in some jurisdictions but not others. It is therefore appropriate to notify third parties only if they are in a relevant jurisdiction and may be affected by the order. In YS GM Marfin II LLC v Lakhani, the claimant went further, warning certain third parties of the order and the risk of being in contempt of court if it was breached, even though they were outside the jurisdiction and were unlikely to be directly affected by it. When two of the defendants objected, the court decided that the claimant's actions did not amount to abuse of process, and so the freezing order should continue. However, corrective letters should be sent to the third parties explaining the true position. The case serves as a reminder to claimants to think twice before sending alarming letters regarding freezing orders to a wide range of companies or individuals.
Although the right to withhold privileged documents from inspection is an important aspect of civil procedure, it is subject to important exceptions. One of these is the so-called 'iniquity exception'. This prevents parties from asserting privilege over legal advice that helped them engage in criminal or similar behaviour. The question, though, is what behaviour is covered by the exception. In Barrowfen Properties v Patel, the English High Court confirmed that it covers fraud "in a relatively wide sense", including a range of "sharp practice" and underhand behaviour. Because the claimant was alleging here that the first defendant had breached directors' duties, and the second defendant (a firm of solicitors) had dishonestly helped him do that, the solicitors' advice should be disclosed. However, this was ordered only because the there was a strong prima facie case that the allegations were true. The court would not have ordered disclosure of the documents on the basis of allegations alone.
The ICC has issued new arbitration rules, although so far only in draft. Not much has changed since the previous revision in 2017, but the rules are more suited to the current Covid era, removing the need for hard copy pleadings and explicitly allowing virtual arbitration hearings. There have also been a few changes aimed at achieving greater efficiency, flexibility and transparency, and others limiting party autonomy in specific ways to avoid unfairness and abusive procedural tactics. Perhaps the most important change is the increased scope of the ICC's Expedited Procedure, which will now apply to all cases worth up to USD 3 million (rather than USD 2 million), unless the parties have previously opted out or the ICC Court decides otherwise. The new rules should be finalised by 1 December, in time for their official launch. They will apply to all arbitrations commenced on or after 1 January 2021, although the new financial limit for the Expedited Procedure will apply only where the arbitration agreement itself is entered into on or after that date.
As the end of the Brexit transition period draws near, companies with European-related claims should consider carefully whether they should issue English proceedings before 11pm (GMT) on 31 December 2020. If they do that, their claims will benefit from EU rules on cross-border litigation, which make it relatively easy to enforce judgments in Member States. This is the case regardless of when the judgments are issued or enforcement proceedings begin (Article 67(2) of the Withdrawal Agreement). After the end of the year substitute arrangements between the UK and EU may be put in place, but this is uncertain at the moment and the arrangements are unlikely to take effect in the short term. There will therefore be a gap in cover, at best, when claimants will need to fall back on national rules when enforcing an English judgment in the EU. These are more difficult to navigate than EU rules, making the enforcement process longer and more expensive and the outcome less certain. In the longer term, many English judgments will be enforceable in the EU and elsewhere under new global rules, but those do not apply widely yet.
Five years ago, the UK's Modern Slavery Act 2015 broke new ground when it required large businesses to report how they prevent modern slavery both in their own operations and in their supply chains. Now the government has decided to strengthen the Act in various ways, including requiring businesses to cover certain topics (such as due diligence and risk assessment) in the slavery and human trafficking statements they file each year. The statements will also be more accessible in future, via a new digital government reporting service. The hope is that this will help consumers, investors and others to hold organisations to account for the steps they have taken in the fight against modern slavery. It is not clear at the moment when the legislative changes will be made: with Brexit and the pandemic to deal with, parliamentary time is limited. However, updated official guidance is expected shortly.