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Legal update for energy lawyers - April 2021

  • Legal Development 27 April 2021 27 April 2021
  • UK & Europe

  • 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.

Legal update for energy lawyers - April 2021

Contents

  1. Validity of penalty clause despite harsh effects

Six years ago, in Cavendish Square Holding BV v Talal El Makdessi, the UK Supreme Court revisited the law of contractual penalty clauses. The judgment changed the way penalty clauses are viewed, introducing a new test to determine whether they are valid or not. This requires the court to consider whether a clause protects a party's legitimate interest, and if so, whether the penalty is proportionate in the circumstances. In Permavent Ltd and another v Makin, the Patents Court applied the test to a penalty clause in a settlement agreement which was designed to protect the Claimants' IP rights relating to a roofing system. The Defendant had breached the agreement by trying to claim those rights, and under the penalty clause he was therefore deprived of certain settlement monies. Although the court held that the effect of the provision was ‘extremely harsh’, it was nevertheless enforceable given the Claimants' need to protect their business and the potentially 'highly damaging consequences' of the Defendant's actions. This decision shows that when ascertaining the validity of penalty clauses, a great deal depends on the context at the time a contract is entered into. As the court emphasised in this case, the actual effects of actions triggering a penalty clause are of limited relevance when considering whether it is valid or not.

  1. Liquidated damages v. unenforceable penalty

The Commercial Court has considered liquidated damages clauses again in De Havilland Aircraft of Canada Ltd v Spicejet Ltd. Here the Defendant agreed to purchase several aircraft, but failed to make all the payments due or to take delivery of all the aircraft, so the Claimant terminated the contract. One issue was whether the Claimant was entitled to the substantial liquidated damages set out in the contract, or whether these were an unenforceable penalty. This depended, in turn, on whether the liquidated damages were a genuine pre-estimate of loss caused by the Defendant's breaches. As in Permavent Ltd and another v Makin (see above), the court assessed this by reference to what seemed reasonable at the time the contract was entered into, not to the losses that were ultimately suffered by the Claimant. Indeed, part of the purpose of a liquidated damages clause was to remove the need to calculate actual losses. On this basis, the court found that the clause was valid. It also took into account the fact that both parties were substantial operators in the aircraft industry, had comparable bargaining powers, and were assisted by experienced and sophisticated lawyers. This suggests that while it is for the party disputing a liquidated damages clause to show that it is unenforceable, that might be easier to do where the parties are not on an equal footing.

  1. SFO secures further bribery conviction in Unaoil investigation

The Serious Fraud Office (SFO) has secured a fourth conviction in its wide-scale Unaoil investigation which uncovered over $17m worth of bribes paid to secure contracts worth $1.7bn. Following a retrial of his case, former senior sales manager, Paul Bond, was found guilty on two counts of conspiracy to give corrupt payments. Bond and others had paid Iraqi public officials almost $1m in return for sensitive information. This enabled them to obtain a $55m contract for the provision of single offshore mooring buoys to be installed in the Persian Gulf. The Director of the SFO commented that “Bond and his co-conspirators manipulated the tendering process for an infrastructure project vital to Iraq’s developing economy, with no regard for the impact. The string of convictions in this case demonstrate the SFO’s determination to root out and prosecute corrupt practices in all corners of the globe working with law enforcement partners across the world.” More

  1. Can an arbitration award be appealed for failure to comply with escalation clause?

Contracts often require parties to negotiate or enter into mediation before commencing arbitration (often both). However, the legal status of such escalation clauses is not always clear. In Republic of Sierra Leone v SL Mining Ltd, the English Commercial Court held that breach of a contractual requirement to attempt settlement and wait three months before commencing arbitration did not allow the resulting award to be challenged on jurisdictional grounds (English Arbitration Act 1996, section 67). Non-compliance with the clause amounted to an issue of admissibility (i.e. whether the claim could be heard at that time) rather than jurisdiction (i.e. whether the tribunal could hear the claim at all). In any case, the specific wording of the condition indicated that the parties had three months to explore settlement if they wished, but did not forbid them to commence arbitration before the three months had ended if an amicable settlement could not be achieved. The case illustrates the importance of drafting escalation clauses tightly so as to ensure that they are complied with.

  1. Arbitration agreements implied by custom and usage

A Grain and Free Trade Association (GAFTA) arbitration award has been successfully challenged in the English Commercial Court on the basis that the parties did not in fact agree to arbitration under GAFTA terms, and so the arbitral tribunal lacked jurisdiction to make the award (English Arbitration Act 1996, section 67). In Black Sea Commodities Ltd v Lemarc Agromond PTE Ltd the Defendant argued, among other things, that an arbitration agreement was implied into the sale contract by industry 'custom and usage', because all transactions concerning Ukrainian corn from the Black Sea contain a GAFTA arbitration clause of a specific kind. The court held that there was insufficient evidence that this was in fact the case. For an arbitration agreement to be implied in this way, the custom must be binding and not simply a usage which parties choose to follow from time to time. The case illustrates the danger of relying on custom where dispute resolution is concerned, as opposed to negotiating an express arbitration or jurisdiction agreement and recording it in writing.

  1. Disclosing documents on employees' personal devices

In general, the English courts require a party to disclose only helpful and harmful documents that are or have been within its control ('standard disclosure' under CPR 31.6 & 31.8). However, in Phones 4U v Deutsche Telekom AG and others, the Court of Appeal confirmed that it is acceptable for a judge to order a party to request access to documents not in its control, in this instance from current and former employees, so the documents could then be reviewed for disclosure. The order was targeted in particular at employees' mobile phones and the emails and messages on them. The appellants objected among other things that it breached Article 8 of the European Convention on Human Rights, which protects an individual's "private and family life, his home and his correspondence". However, the Court of Appeal disagreed, holding that there is no "jurisdictional impediment" to an order of this kind, provided it is proportionate and complies with the General Data Protection Regulation (now onshored following Brexit). The court stressed that the employees were only being asked to hand over their phones, not told to do that, and it described the order as "pragmatic and sensible" in the circumstances.

  1. Use of competitors' confidential information

Previously, there was little authority as to whether a business is free to use confidential information of a competitor that it has obtained through a third party. Now the Court of Appeal has ruled in Travel Counsellors Ltd v Trailfinders Ltd that the information should not be used if the business that has obtained it knows (or should know) that it is confidential. In this case, employees left the Claimant to join the Defendant and took with them confidential information in respect of various customers. The Defendant did not make enquiries as to the status of the information and made use of the information. The Defendant sought to argue that it had no knowledge and was not on notice that the information was confidential so it could not be under any duty of confidentiality. The Court of Appeal disagreed. It found that “[i]f the reasonable person would make enquiries, but the recipient abstains from doing so, then an obligation of confidentiality will arise.” This places the onus on a party receiving information from a competitor (whether directly or indirectly) to enquire whether it is confidential before proceeding to use it. However, there is no absolute duty to do so. The court acknowledged that whether enquiries as to the confidentiality of the information are necessary and the extent of any such enquiries will turn on the relevant context and facts.

  1. Injunction against climate protestors

The English High Court has issued an interim injunction against climate activists protesting outside a site in Surrey (UK Oil and Gas Plc (formerly UK Oil and Gas Investments Plc) v Persons Unknown, 2021). The injunction prevents the protestors from entering or remaining on the site. They are also forbidden to climb onto vehicles or trailers coming into or out of the site, or to obstruct a particular entrance so as to prevent the Claimants, contractors and others from entering or leaving the premises. However, the scope of the injunction is narrower than one granted in 2018. It does not prohibit protest outside the site, for example, and walking slowly on the highway in front of vehicles is also permitted. In the court's view this strikes the right balance, given the protestors' rights under the European Convention on Human Rights, Articles 10 and 11 (on freedom of expression and of assembly).

  1. North Sea Transition Deal

The UK government has published its North Sea Transition Deal, which sets out an ambitious plan for how the country's oil and gas sector can work together with the government to deliver the skills, innovation and new infrastructure required to meet greenhouse gas emissions targets. The government admits that the targets are 'stretching' and the plans 'ambitious'. However, it says that as well as helping the UK meet its targets, the Deal should help both safeguard and create new jobs, as well as acting as a catalyst to growth in other sectors of the national economy. Among other things, the Deal makes provision for early reductions in offshore production emissions (10% by 2025, 25% by 2027, and 50% by 2030, against a 2018 baseline), investment in new energy technologies of up to £14-16 billion by 2030, and a voluntary industry target of 50% local UK content across the lifecycle for all related new energy technology projects by the same date. More

End

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