Energy Disputes 10 thoughts for 2022

In this briefing, our London energy disputes specialists reflect on the lessons learned in 2021, and what they may tell us about the 12 months ahead.

1. Energy transition –disruption equals disputes

In the aftermath of COP26, the focus on energy transition and the path to net zero has intensified. Our recent Energy Transition Investment survey (here) found that 91 per cent of the executives surveyed expect to see an increase in the number of disputes in this area. 64 per cent of respondents identified individuals or pressure groups as the most likely counterparts to disputes, with 57 per cent citing governments or other authorities. However, while such cases may grab the headlines, disputes between corporates, arising from energy transition technology and fast-evolving markets, are likely to form a large proportion of cases overall.

2. In EMEA - climate change–inspired litigation

This is becoming more and more frequent. Last year we highlighted Milieudefensie v Royal Dutch Shell plc in the Netherlands as a case to watch. In 2021, the Hague District Court ordered Shell to reduce its group-wide carbon emissions by 45 per cent (net) compared with 2019 levels, by the end of 2030. Shell announced that it would appeal. In France, in the "Case of the Century", Notre Affaire à Tous, Greenpeace France, Oxfam France and the Fondation Pour la Nature et l'Homme successfully sued the French state. The Paris Administrative court ordered the French state to take action to address its failure to combat climate change. Cases against oil companies also continue to emerge. For example, in Germany, Wintershall Dea received a claim based on obligations under the German Climate Protection Act and the Paris Agreement.

Over the next few years, claims are expected to build on developments in previous litigation, with a particular focus on human rights arguments, such as those derived from Articles 2 (the right to life) and 8 (the right to respect for private and family life) of the European Convention on Human Rights.

3. English tortious parent company liability

Such liability for the actions of parent companies' subsidiaries (or joint ventures) remains a prominent issue. In February, the UK Supreme Court ruled in Okpabi v Royal Dutch Shell [2021] UKSC 3 that there was a real issue to be tried as to whether a parent company owed a duty of care to Nigerian citizens in respect of alleged wrongdoing by the parent's Nigerian subsidiary. In an ongoing case concerning the Fundão dam disaster in Brazil, the Court of Appeal reopened and reversed a decision to refuse permission to appeal the strike-out of claims in Municipio de Mariana v BHP Group [2021] EWCA Civ 1156 arising from allegations against an international mining company. Although each of these cases involved preliminary issues of jurisdiction and case management, they indicate a willingness on the part of the senior English courts to entertain allegations of parent company responsibility for tortious claims.

4. Corporate crime – focus on the energy sector

Bribery and corruption issues have also made headlines recently in the energy services sector. In October 2021, Petrofac Ltd pleaded guilty in the UK to seven counts of failing to prevent bribery (under section 7 of the Bribery Act 2010) and was ordered to pay £77 million in total. Engineering company Amec Foster Wheeler has also been caught up, entering into a £103 million deferred prosecution agreement with UK authorities in July 2021 and taking responsibility for ten corruption offences around the world between 1996 and 2014. These cases demonstrate a continued focus on bribery issues in the energy industry and the willingness of authorities to pursue them.

5. Defects and late completion of low-carbon/renewables projects

These are generating a large number of disputes, both before the courts and in international arbitration. The English Commercial Court case Toucan Energy v Wirsol Energy [2021] EWHC 895 (Comm) is typical of this theme, with the owner of 19 solar energy parks bringing claims alleging numerous defects against the parks' EPC Contractor. Although the claimant succeeded on only some of its claims, disputes of this nature are expected to increase as investment capital rushes into developing technologies in the push towards net zero.

6. Digitalisation of the energy industry – practical challenges await

Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29 illustrates the broader theme of digitalisation of the energy industry. In this case, litigation arose from a contract for supply of a software system intended to facilitate an energy company's activities in regard to trading commodities. The case generated commentary as it resulted in the UK Supreme Court considering the circumstances in which an employer could claim liquidated damages when a contract is terminated. The Supreme Court restored the orthodox approach, namely that the employer's accrued right to liquidated damages survives until the date the contract is terminated, and thereafter damages are assessed in the usual way (see Ashurst briefing here). Legally significant in its own right, the case also illustrates what can go wrong with complicated software contracts – a cautionary tale for the energy sector as digitalisation gathers pace.

7. Decommissioning and asset retirement obligation disputes

These will continue to arise as companies allocate capital away from fossil fuels extraction, and producing assets come to the end of their productive lives. The English Commercial Court case Apache UK Investment Limited v Esso Exploration and Production UK Limited [2021] EWHC 1283 (Comm) provided useful judicial commentary on the decommissioning regime under the UK Petroleum Act 1998, confirming that a former licensee will not be liable for the decommissioning of wells drilled after the licensee ceased to be the owner of the relevant oil and gas assets (see Ashurst briefing here).

8. Gas price and supply disputes

These are proliferating as wholesale gas prices remain high across developed economies. Parties contemplating initiating contractual price reviews should heed the lesson of the Western Australia Court of Appeal ruling in Chevron (TAPL) Pty Ltd v Pilbara Iron Company (Services) Pty Ltd [2021] WASCA 193. In that case, the court found that a notice issued three weeks outside of the permitted notification window was invalid – the price review under the gas supply agreement could be initiated only by issuing a relevant notice within the time period stipulated in that clause (see Ashurst briefing here).

9. The future of investment treaty arbitration in the industry

This issue is in the spotlight. RWE and Uniper's claims against the Netherlands under the Energy Charter Treaty (ECT) arising from the kingdom's decision to phase out coal have drawn attention to the role of the ECT in the context of energy transition. At the same time, discussions are under way to modernise the ECT and bring emerging transition technologies within its scope, among other amendments. The Court of Justice of the European Union September 2021 judgment in Moldova v Komstroy LLC found that ECT arbitrations brought by EU investors against other EU states are incompatible with EU law, raising issues of jurisdiction and enforceability of arbitration awards arising from so-called intra-EU arbitrations.

10. Arbitration combined with ADR

This continues to rise in popularity. The most recent Queen Mary University of London International Arbitration Survey found an increase in demand for mediation, with 59 per cent of respondents preferring a combination of alternative dispute resolution and arbitration, while 31 per cent preferred arbitration alone. At the same time, there have been a number of English cases in which judges have declined to set aside awards issued by arbitrators despite a failure by the claimant to comply with pre-arbitration ADR steps. The 2021 cases of NWA and others v NVF and others [2021] EWHC 2666 (Comm) and Republic of Sierra Leone v SL Mining Ltd [2021] EWHC 286 (Comm) concluded that the effect of non-compliance gave rise to an issue of admissibility of any claim (and so to be determined by the arbitrators) rather than an issue of jurisdiction (which would render an award vulnerable to being set aside by a court under section 67 of the English Arbitration Act on the basis that the arbitrators lacked substantive jurisdiction). These judgments provide helpful clarification as to the potential impact of not following pre-arbitral steps, and are likely to promote the use of so-called tiered dispute resolution provisions, including mediation or other forms of ADR, prior to arbitration. Of course, if a mandatory pre-arbitration ADR process is not complied with, an arbitrator could still rule a claim inadmissible, so care should be taken when considering whether to include such a process in a dispute resolution clause.