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Speaker
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Transcript
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Jess Evans, Partner, Burges Salmon
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[music] Hello everyone, welcome back to Risk Rewired, the energy dispute podcast from Burges Salmon. My name is Jess Evans and I'm a partner in the Energy Disputes team here at Burges Salmon and I'm your host for this part two of our bumper episode looking at emerging legal trends in the energy sector.
In part one I was joined by Serena Cheng KC and the Honourable James Allsop AC, both leading legal practitioners in energy and commercial disputes. In part one, we looked at one of the most pivotal trends in the sector being the development of climate change litigation and more specifically the role of the sovereign courts when it comes to shaping and implementing public policy surrounding the management and the mitigation of emissions. In this part two, I am delighted to continue the conversation with Serena and James, in this episode we look at another emerging trend in the energy sector.
We've touched on some of the intricacies of climate change and the developments of litigation in this area particularly across the different sovereign courts if we perhaps look a bit more widely at some of the potential emerging trends then we've seen some commentators talk about the development of good faith in English law particularly in the context of energy contracts when we're seeing for example unincorporated joint ventures who are together looking to develop pathfinder projects, so I don't know if you've got any thoughts either of you on that area.
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Serena Cheng KC, Atkin Chambers
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You are looking at new technologies that are being developed between new players in the market so what we see a bit of is let's say a smaller process engineering company or smaller engineering company that has a new way of generating or of disposing of plastics or some new technology, they partner with a larger player who's got the experience and the contacts and the supply chain to scale that in a way that makes it economically viable so those two parties will walk down a road together where on the technological side they're very much in partnership and I'm seeing contracts that are really very high value, very technically detailed, but they are bespoke contracts, they're not fitted contracts, they're not on any standard form, they don't contain fluctuation clauses, force majeure clauses or anything but what you're seeing is a clause that says we will build out this first stream which we know is going to work and then with the second, we will do this which is take certain steps if we can achieve this outturn product or if we can achieve this generating capacity then x will happen. If we can't, we will work together in good faith to try and resolve what happens next.
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The Hon James Allsop, Atkin Chambers
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Now you will see a rise in contracts that are more like joint ventures whether than and the won't be fiduciaries on the assumption that I don't want to go into a partnership with you, but they're joint ventures in which they written in language at a level of generality where good faith is an essential part of the tissue of the contract because it can't work without in the future you cooperating in a way that is best endeavours good faith, however you want to express it.
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Serena
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Because you are working together to do something unknown and unknowable.
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James
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And those contracts are really interesting I mean they're like true you mining joint venture or joint venture projects where you do everything that a partner would do, without having you look at the person, you look at their skill, you look at their honesty, you're prepared to trust them but you frame it that it's not fiduciary it's joint venture so good faith in the contractual sense must take the strain of these contracts being able to work, without being fiduciary good faith.
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Jess
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We have in the courts of English and Wales we have the concept of relational contracts which seems to be close to what we're talking about and I was going to say exactly that development of good faith into English law that is a huge turn that and as Serena's already expressing very clearly her thoughts in terms of what that development could look like, but Serena go on take us further.
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James
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Nature said a lot of things but he did say tax all taxonomies are evil and if I may say the English do like a good taxonomical body of categories.
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Serena
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And we don't like, well some of us that don't particularly like good faith, I think from my perspective I'm seeing cases where the contract essentially walks the parties hand in hand to an edge and then at the precipice there isn't anything left apart from working together in good faith.
And as an English lawyer there's no safety in it and I would much rather the contract had a root map that led me across the chasm rather than requiring me to trust because I think it is a taxonomical problem and it is an English problem but it's also a certainty issue.
What are your obligations going forward?
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James
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And I mean well this is another podcast about certainty and contracts and how you get certainty and I think this is a really interesting area for English lawyers and lawyers common law lawyers and transactional lawyers because you are entering a sphere that if you try to be too precise it's like drafting a patent specification if you're too precise, your invention is very narrow, if you're too broad it'll be void and bad for obviousness because the breadth of it you know includes the donkey and the cart and the wheel and so to the extent that firms are going to have to partner up as it were, not in the partnership sense, but in the business partner sense to go into the unknown but not be partners but to be joint ventures' it's going to be something that has to take the strain for the lack of ability yeah to be to be expressly precise because you're working together to solve a problem you don't know where you're going and you can call it a relational contract if you like it's just a label that this is where you you have to help each other in your own interests.
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Serena
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But also think with because these are with the pathfinder contracts people are doing things for the first time, they're doing it in a different way and I've seen ones where there's an open book approach if I may put it in that way and there isn't a route across the chasm but there is a statement that says within the boundaries of this which is my the funder's financial plan and within a minimum offtake amount, which is this, which is what I need as the operator to simply keep it running and that narrows the chasm without telling the parties how they should cross it it gives them a road map that said look we've now got less of a gap to bridge and let's hope that that way the good faith, the work that good faith has to do the lifting that good faith has to do is less.
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James
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Remembering what good faith is, in this contractual sense, it's the contractual obligation to support the bargain you have entered and not undermine it.
It's not looking after their interests in preference to your own, it's not equity it's an obligation to not just perform your obligations but to support the bargain and not undermine it and if the bargain is more open-ended and unclear about where it's going because of what it is a pathfinder contract, which is a nice way of putting it, then the good faith is to find the path together, to try, and not undermining finding the path together and going off with some other party and entering an arrangement and doing it over there and for more return because this it's more profitable with his conflict.
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Jess
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Yes, this is a really interesting area, and just to pick another couple of examples of key claims in the public law space, the first example is again ClientEarth's attempt to judicially review the FCA and the JR related to a submission by a company called Ithaca Energy plc, which is a large North Sea oil and gas operator, of their prospectus for approval by the FCA as part of the process for listing the company on the London Stock Exchange.
So ClientEarth argued that the FCA's decision to approve Ithaca's prospectus was unlawful because it didn't comply with this regulation called the Prospectus Regulation, and specifically ClientEarth said that the FCA's approval of the prospectus due to the inadequate disclosure of Ithaca's assessment of materiality of climate related financial risks was wrong in law, so that's the first basis, and then the second one was the FCA's conclusion that the prospectus was sufficient and provided investors with an informed assessment of the risks and financial position of the company was rationally unsustainable, so the key decision that came from this case was that the Judge decided that those grounds were unarguable.
So it was considered outside of the scope of the FCA's authority to provide an analysis whether a prospectus impacts climate change, promotes consistency with Net Zero, or promotes climate change mitigation. And this decision is important because it highlights the purpose of that regulation is to ensure companies such as Ithaca make disclosures which properly inform investors, however the court said that the obligation is not akin to one to protect or regulate the environment despite the existence of the Paris Agreement, or other environmental legislation.
So fast forwarding a bit to a more recent decision, it is an important decision called Finch and Surrey County Council. So this was a case brought against the council following their decision to permit expansion of an onshore oil well. So the case was based upon an alleged failure by the council to assess the environmental impact of the downstream greenhouse gas emissions from the oil extracted from that site, rather than just the greenhouse gas emissions from the site; construction, production, decommissioning, and subsequent restoration to the original state that it was in, as part of an environmental impact assessment.
So the environmental impact assessment is important because it's a major component of the planning application and the case proceeded to the Supreme Court which, in a very recent ruling, determined that the environmental impact assessment was required to, but in this case did not, include an assessment of combustion emissions when the oil that was produced from the site was eventually burnt.
So in this context the ruling has obvious implications in the energy sector for planning of future fossil fuel projects, or other energy projects which involve high carbon emissions.
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Serena
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Yeah I think you're, I'm reluctantly agreeing I think where that chasm exists and the unknown is unknowable we have to have something and good faith in the way James that you describe it fills that gap quite well, if for no other reason then it tells you what you can't do and that gives me the certainty that I want. You got someone who you trust them and you say well I know these people and I trust them and they're legal obligations not just it's not to be nice to me.
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James
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It's not to undermine our bargain and to support our bargain which we're both committed to and I've got that obligation too, to support the bargain and not undermine it deliberately.
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Serena
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And it means that you know as I say the steps that you cannot take and you know that you can judge that given the facts that you're facing at the moment, or tomorrow, or the next day and it has that elasticity that the path sign of contracts requires whilst putting the barriers up or the boundaries down, these are the steps you're not allowed to take. And I may be agreeing with you.
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James
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You've just shown if I may put it, you've just shown very clearly and elegantly how certainty arises from known circumstances rather than definitions the certainty that you can get in a pathfinder contract comes from knowing your counterparty and knowing and trusting and knowing that they have broad obligations that you understand that mean that they won't undermine your contract, if they were to act lawfully. And you trust them so people get a lot of certainty from those kinds of general circumstances as opposed to definition.
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Serena
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I think you've done that thing that judges often do which is to persuade council that their argument is wrong in a very short period of time.
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Jess
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Well we could probably combine them I mean it seems to be Serena where you're coming from is your preference is to inevitably have clear contractual outputs, deliverables, obligations, but with an overlay accepting there is the chasm that needs to be traversed so there is a still perhaps a role for good faith in some of these these wider projects.
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Serena
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Yeah I would probably go broader than that I think they're interesting contracts because they're interesting projects and they're interesting contracts because they aren't bounded rounds and they do allow the party scope to explore and that means that if the Outtrim is higher than anyone expected they both benefit and if it's lower they'll find a way together without, as James says, going off and doing it with somebody else so they're interesting, they're refreshing, how they'll come to be enforced is going to also be interesting because as James says you know it's acting in good faith so as to honour the bargain, that doesn't allow you to have a sudden increase in the contract price because of the war in Russia etc and exactly as James says, good faith is sufficiently clear to let you know what you cannot do and what you have to do and in some ways that's all you need, on a pathfinder project where you don't know what you're going to get.
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James
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The great problem with good faith and I understand why English lawyers and I and I had the same view for many years and I have the same view in relation to some contracts, is if you look at the great kind of chaos of conflicting decisions and views in the United States of America, that's the problem the problem is you're looking at the wrong thing because there is no such thing, apart from maritime law, there's no such thing as the general common law of the United States of America, it's all states. If you go to New York and read the New York Court of Appeals from 1890 to 1965, you'll find the most beautiful body of 20 or 30 cases on good faith. It's not equity, it's not some responsibility to be nice to anyone it's to support the bargain you've agreed to this, you have an obligation to further it and not undermine it and if you understand that about it, it's not scary at all and it's not equity and it's not having to take into account others interests before yours it's your obligation to support what you've agreed the bargain that you've agreed to enter and not undermine it and if it's viewed thus it's in English law in all sorts of places, in particular places, you know the duty to build an instance to if someone's got the contractual entitlement to extract work from the contract to excise work from the contract, you've got to exercise that in good faith, you can't just do it arbitrarily, I mean there's a whole range of kind of little bits and pieces in conveyancing in you know where you have an obligation to act reasonably and in good faith in the sense of for the reasonable performance of the contract.
And you can't do something well I want it, I think I don't want you as a contractor anymore, therefore if I take this out of the contract you won't be able to make any money and I'll be able to wind you up, I mean you can't do that, why can't you? Because you're undermining the bargain but it is relevant to to what we're talking about because as you say these types of contracts where the business people are getting together to go into the unknown and make some money together and take risk together in making that money but who don't want to be partners or you know the last thing they want is to be partners.
But they do want to be a kind of joint venture and you know through a contract, through an open contract
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Serena
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The future is in good faith and injunctions.
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James
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Well might be the strength, the together, being an equity lawyer, a commercial and equity lawyer, you know the injunction is often forgotten for damages it's a very powerful potentially very powerful tool and it's interesting because the civilians you know the notion of and what underpins injunctions is the law of contempt which doesn't exist in most civil you know it's up to the executive to enforce the idea of courts throwing people in jail who won't obey their orders is an athame to most civil law countries that kind of power in the judiciary to punish for contempt.
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Serena
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Well we could probably combine them I mean it seems to be Serena where And in some way that's probably the way you police the good faith obligation and the example that you gave James of you will not undermine the bargain by for example going off with somebody else and completing the project with somebody else, again to draw the threads together, that could be something that's enforced by way of an injunction a prohibitory injunction against this because it would be a breach of contracts.
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James
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Yeah and it may involve the release of confidential information and all that various other things yeah.
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Serena
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So there's me now agreeing with good faith in the use of injunctions to enforce contractual obligations.
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Jess
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James, Serena thank you so much for your time today, your insights today are absolutely invaluable and clearly these are areas which will continue to be hugely interesting moving forward. Thank you again for your time and it's wonderful to have had you here on the podcast today.
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Serena
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Thank you very much for having me, it's been a pleasure.
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James
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Yeah likewise, been a great pleasure, thank you both Serena and Jessica.
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Jess
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Thank you for listening to Risk Rewired, the energy disputes podcast. If you'd like to know more about any of the points discussed today or our Energy Disputes team more generally and how we can work with you, you can contact us via our website. Thank you very much for listening and bye for now.
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