Quarterly

In November 2022, Christiane Deniger and Matt Lee spoke with a group of energy dispute experts about the effects of the energy transition on commercial disputes, the impact of the Russia-Ukraine conflict and supply chain issues and the use of legal finance in the sector.

How will the energy transition impact the commercial disputes landscape? What kinds of business-to-business disputes do you expect to see arising from the transition?

Mark Beeley: As the scale of investment in renewables and alternatives grows, the size of disputes related to those technologies will also increase. Both solar and wind generation have already proved to be good generators of disputes in respect of the construction of the developments, the level of power being produced and the existence of technological defects. These disputes can arise during both the initial construction and during the subsequent onward sale, particularly given the offshore transmission owner (OFTO)/developer model, which is increasingly being used.  

Paul Brumpton: The energy transition is one of the most significant issues of our time. As the coverage of the recent COP 27 demonstrates, there remain sharp differences of opinion on the international stage. In the private sector, it is clear that the transition is becoming an increasingly important consideration. According to a recent survey conducted by White & Case, 42% of corporates identify energy transition investment as a high priority, compared with just 14% two years ago.¹ The same survey also highlighted that energy companies expect to invest heavily in greenfield renewable energy projects and carbon capture technology in the coming years. 

This investment in new projects and technology carries with it the potential for various types of disputes. The first and most obvious are joint venture disputes. The cost and time associated with developing new projects and technology typically require collaboration between companies, supported by a web of contractual rights and obligations. As with joint ventures in other industries, these obligations and rights often lead to friction between stakeholders and the potential for disputes. 

Construction related disputes are also likely to arise. Renewable energy projects typically involve the construction of large and complex infrastructure, with the inevitable risk of delay, disruption, and defects. The acquisition and disposal of projects and technologies represent a further area of potential dispute. This is because the representations, warranties and indemnities usually included in sale and purchase agreements are fertile ground for disagreement. This is particularly true in heavily regulated industries such as the energy sector, where changes in regulation can have significant consequences for the value of investments.

In addition to new projects and technology, the energy transition creates significant scope for disputes relating to existing oil and gas assets. For example, the decommissioning of oil and gas fields gives rise to complex questions about how liability should be apportioned between the current and historic operators of the fields. New regulations issued by governments may also have implications for the commercial viability of these assets.

Samantha Daly and Robert Johnston: With governments around the world, including Australia’s new labor government, heavily pressing the energy transition agenda, there will be billions of dollars poured into renewable projects. This will give rise to significant pressures on funding, raw materials, construction materials and capabilities, as it always does with construction booms; and, when that occurs, significant disputes inevitably follow, especially in the international arbitration space. We will see a significant rise in international arbitrations over the next decade and that will create significant opportunities for disputes lawyers and litigation finance players.

Cameron Kelly: The past decade has seen an increase in state cooperation and a shift in the commercial drivers within the private sector. States are looking to invest in private ventures to accelerate the energy transition and investors are looking to deploy capital in accordance with ESG principles. It is expected that with the increased amount of activity (such as new infrastructure projects, public-private partnerships and partnerships between competitors) there will be friction and flashpoints that will lead to formal disputes.

Reports in 2019 from the International Chamber of Commerce (ICC) and Stockholm Chamber of Commerce (SCC) forecast an exponential increase in climate-related commercial disputes. The ICC and SCC indicate this increase is attributed to the likelihood of regulatory change, the increased significance of factors like shareholder sentiment and ESG concerns (including the difference in emphasis on these factors for different parties) and the evolution of market norms, like partnerships between different kinds of market players.

Specifically, corporate decarbonization disputes will also arise from mismatches between commercial counterparties, for example where transaction documents do not deal with issues arising because a counterparty wants to go beyond regulated decarbonization requirements. Additionally, the energy transition requires a pace of change not previously seen. This can result in divergences in expectations, including ambitious timelines that are impractical given the supply chain issues the world is currently facing. We may also see an increase in disputes as reactions to COP27 come into play, resulting in changed regulations that could invoke “change in law” clauses.

How is the conflict in Russia and Ukraine affecting commercial deals and transactions in the energy sector? Do you expect a rise in contractual disputes in the sector, and what might those disputes look like?

Mark Beeley: The ongoing conflict and its impact on the economy will naturally lead to additional disputes. As prices soar and supply contracts are stress tested, there will no doubt be a rash of long-term pricing disputes, as well as claims of force majeure and frustration over the inability to source feedstock. 

In addition, the imposition of sanctions will give rise to and is already giving rise to, a number of disputes arising out of the impact of those sanctions. Counterparties are facing the fact that they may not be legally able to carry out their contracts with sanctioned counterparties, or will face dramatic reputational risk if they do. Businesses that have claims against sanctioned entities will be faced with particular challenges in recovering against such entities, with international enforcement strategies being complicated by the need to obtain licenses.

Finally, it is reasonable to assume that there will be a rash of disputes driven simply by the fact that with prices rising and resources scarce, companies will not be able to simply suffer contractual defaults as a normal cost of doing business. Business will have to litigate to survive in this market. As a result, cases that might otherwise have been deemed too speculative may now be pursued in the name of value preservation.

Samantha Daly and Robert Johnston: The conflict in Russia and Ukraine has caused havoc not only with energy prices but also the supply of some key raw materials required both for traditional energy generation and renewable energy generation.  That creates legal pressures and stresses between contracting parties with breaches, delays and other disputes arising which again will see a major uptick in litigation and international arbitration.

Paul Brumpton: The Russia-Ukraine conflict has created a significant shortfall in oil and gas supplies to Europe, with associated, and often dramatic, increases in wholesale and retail prices. These supply shortfalls and price spikes have already led to contractual disputes in the energy sector, which are likely to persist.

The current environment creates particular issues for long-term gas supply agreements. Two issues are particularly noteworthy. First, the ability and in some cases the willingness of sellers to deliver the contractually required volumes of gas has been negatively impacted. For example, it has been widely reported that Gazprom has reduced or suspended gas supplies to a number of countries in Europe. This creates immediate issues for purchasers under long-term supply agreements, who have their own obligations to supply commercial and retail end-users. Second, and in the longer term, high gas prices are likely to lead to an increased number of price review arbitrations.

More generally, the conflict risks hindering the performance of any contracts, or contracting parties, with significant connections to Russia or Ukraine. Where the performance of a contract becomes more expensive, more difficult, or impossible, a wide range of legal issues arise. For instance, the interpretation and application of force majeure, material adverse change, hardship, liquidated damages, and indemnity clauses, are all likely to be hot topics. Related to this, where contracting parties are themselves subject to sanctions, complex issues arise in relation to the continued performance of the contract. Finally, companies exiting their Russia‑related energy investments or joint ventures might face disputes relating to the divestiture of their assets and potential non-fulfilment of financing commitments.

Cameron Kelly: The conflict in the Ukraine is impacting commercial deals and transactions in several ways. Nearly all international companies operating in the Eastern European region have been affected. This has resulted in an immediate need for practical considerations such as the safety of workers and the ability of workers on the ground to maintain operations while ensuring compliance with the international sanctions against Russia. Companies that are withdrawing from Russia may also need to unwind complex legal relationships, which can give rise to liability risks and potential claims. Overall, the main impact of the conflict in Europe is an increase in time and costs across all supply chains. This is caused by several factors, including implications on transport routes, sanctions on transport companies operating out of Russia, increased movement of weapons in support of Ukraine and their prioritization over commercial shipments, and perhaps most importantly, the increased cost of energy related to oil and gas.

Historically, high oil prices have meant fewer disputes, due to the high costs of litigation (which can temper appetites for bringing claims). However, coupled with the supply chain crunch and political instability, there are suggestions that we will see an increase in commercial disputes. One reason is that disputes will become necessary to enforce contracts, another is that the crunch in the oil and gas sector has accelerated the need for renewable energy as an alternative. In the medium term, this is expected to drive more M&A activity at accelerated timelines. A side effect of moving too quickly is that it can lead to mistakes, whether it be at the deal-making phase or the construction phase of a project.

Another reason behind disputes related to the conflict between Russia and Ukraine is businesses trying to invoke “get out” doctrines. In particular, relying on material adverse change clauses that are typically found in finance agreements, transactions and sometimes in other types of contracts. They can enable a party to terminate a contract, but they often trigger other mechanisms too, such as the doctrine of frustration. This is especially true if a commercial deal involves a Russian counterparty that can no longer carry out its contractual obligations because of the war and the resulting sanctions. Force majeure clauses may also give grounds for termination of a contract; however, they can be difficult to enforce.

It is now clear that the war between Russia and Ukraine will not end anytime soon. Organizations with “skin in the game” should keep abreast of updates and developments that could affect their available options. An example of this is a decision made by the Russian courts this year giving Russia jurisdiction to hear disputes involving Russian-sanctioned individuals and entities. This means that companies that previously believed that any dispute would be heard in accordance with their dispute resolution clauses could potentially find themselves in a Russian court rather than where they believed the dispute would be heard in pursuance to their contract.

The supply chain is a significant source of risk and uncertainty for the oil and gas sector even in the best of times, and the last year’s events have further exacerbated that harsh reality. Can you address how you are helping clients navigate the heightened risk and uncertainty in their supply chains? What tools are being used when it comes to commercial disputes?

Samantha Daly and Robert Johnston: One of the often unseen aspects of governments moving to renewable energy supplies is the consequential move away from fossil fuels including the disruption of fossil fuel or other traditional energy projects that have been in the pipeline for years, if not decades. This has seen a number of very significant international Bilateral Investment Treaty arbitrations in which billions of dollars are at stake. These sorts of under-the-radar disputes will continue to grow.

Mark Beeley: Both Covid-19 and the impact of the Ukraine conflict have highlighted the danger in supply chains having inconsistent force majeure regimes or vague definitions of force majeure which leave parties exposed in circumstances where perhaps their own ability to call force majeure is narrower than their supplier, or where an event such as the conflict has not made performance impossible but turned the economics of performance radically upside down.  In such circumstances, litigation or arbitration may offer a short-term solution to the immediate delivery failure, but may fatally damage a supply chain that cannot be easily replaced. Alternative solutions such as bespoke mediation before a highly skilled mediator may offer the ability to let multiple parties across a contracting chain find a way that allows them all to share the pain and reach a practical solution that cannot actually be achieved through formal dispute resolution alone.

Paul Brumpton: The heightened risk and uncertainty in supply chains can be mitigated on two levels: First, by adopting strategies to avoid potential disputes and, second, by ensuring disputes are resolved in an efficient and cost-effective manner when they do arise.

It is important to explore whether mechanisms can be incorporated into contracts that help deal with risk and uncertainty. For example, a typical risk associated with supply chains in the energy sector is that of equipment suppliers requesting increases in prices. This is due to corresponding price spikes in raw materials caused by supply chain disruptions. Avoiding the fixing of prices at the outset of a longer project or including a price escalation or price review provision in supply contracts are effective ways of managing this risk. Similarly, providing for insurance or escrow arrangements as part of a contractual relationship can assist if a counterparty fails to perform.   

There are various steps that parties can take to ensure disputes do not become disproportionately expensive or time-consuming. These include joining third parties to proceedings or consolidating different proceedings together. Both are particularly useful techniques where disputes arise across a supply chain, which is likely to involve multiple parties and contracts.

Cameron Kelly: As in-house lawyers, the organization or business we work at is also our client. This means we need to make sure the organization is protected against potential supply chain risks. From a legal perspective the most impact we can have in this respect is through airtight contract drafting and ensuring effective due diligence is undertaken prior to committing to projects.

By way of example, force majeure cases have increased because of supply chain issues caused firstly by Covid-19 and now the war in Ukraine. Proving force majeure can be very difficult and in most cases it is contested. The Kwinana case recently heard in Western Australia is an example of this.² The EPC contractor attempted to obtain a declaration from the Western Australian Supreme Court to enable it to terminate the contract or to obtain a significant extension of both time and payment granted as a result of Covid-19 and the resulting issues with staff and materials being locked out of Western Australia. While the EPC Contractor was unsuccessful, this case demonstrates the appetite for companies to try their luck with enforcing force majeure clauses in contracts off the back of recent events like Covid-19.

Uncertainty in pricing also creates complications in contracts. As a purchaser, how can you lock in a purchase price to make a project bankable? As a supplier, how can you make the purchase price as flexible as possible to allow for increases in price on the supply side? EPC repricing is a material risk and is seen on a number of our recent and current projects.

Supply chains have been caught in a perfect storm of Covid-19, war, and other issues, such as the Evergreen cargo ship getting stuck in the Suez Canal – this is set to continue. In the short term, there is a backlog to recover and in the medium to long term, there will be increased demand for new technologies emerging as part of the energy transition which are low in supply.

How will litigation and arbitration be affected by the current ESG disclosures and what are the challenges businesses might face?

Cameron Kelly: There are several challenges businesses will face and a number of affects ESG disclosures can have on litigation and arbitration. Businesses need to be sure they are compliant with relevant laws, and they need to conduct due diligence on their supply and source materials to ensure they are ESG compliant. This can be difficult in areas where ESG issues are not easy to control or there is not much visibility over them.

Businesses are increasingly being asked to provide warranties in contracts that their activities are responsible with regards to ESG compliance. The International Standards Sustainability Standards Board principles (ISSB Principles) will set a baseline standard in the future for reporting on businesses’ sustainability-related risks, which are similar to current ESG disclosures but in a way that aligns capital markets globally for simpler ‘apple to apple’ reviews to take place. This enables consistent and comparable sustainability information to be available to investors and will hopefully mitigate some of the challenges faced by businesses trying to match various ESG disclosure requirements.

However, cross-border projects have also an added layer of complexity because failure to comply with ESG requirements may be mitigated by rights under International Investment Agreements (IIAs) (also referred to as Bilateral Investment Treaties). In the Australian context, many companies operating overseas benefit from the legal protections offered under IIAs. Where companies rely on IIAs for their business, they must also be careful not to be stung by changes in IIAs resulting from events such as COP27.

In relation to other potential challenges faced by businesses, Baker McKenzie’s “The Year Ahead: Global Disputes Forecast 2022” report found that Covid-19 remains the biggest external factor driving disputes, with cybersecurity and ESG disputes presenting the greatest risks to business.³ Out of 2,000 ongoing or concluded climate change cases around the world, key areas being contested include reduction commitments, greenwashing, and attribution of responsibility for adverse climate impacts.

Additionally, class action claims such as Sharma v Minister for Environment, brought with respect to a future coal mine extension on behalf of eight children, illustrate that people are demanding environmental responsibility. This now extends to investors who are requesting ESG reports from businesses and demonstrates that the environmental impact of project is now a key consideration in transactions.

Samantha Daly and Robert Johnson: The focus on ESG has already had several significant effects on disputes. In the US, we have seen ideological battles between the pro shareholder return and anti ESG groups on the one hand and pro climate change and pro ESG investors groups on the other with no clear winner as of yet.  We have seen “greenwashing” claims in the courts and as a focus of regulators. We have seen banks and pension funds pull financing and investments out of fossil fuel projects, which has all sorts of collateral consequences including shareholder claims resulting for the loss in value of impaired assets. In our view, this area of litigation will only increase in the years to come. This is because there will be a failure by governments and corporations to act and as a result, concerned citizens will do what they have always done and resort to the courts to vindicate their rights.

How do you foresee the broad acceptance of legal finance impacting the arbitration landscape, particularly in the energy sector?

Mark Beeley: The broad acceptance of legal finance has transformed many elements of the arbitration landscape, particularly in circumstances where financing has moved beyond being a tool for those who could not afford to bring a claim, to a tool that sophisticated and well-heeled entities use to mitigate risks and move litigation costs off their own balance sheets. One particularly positive development is the slow- breaking impact that funding has on overall legal bills. The necessary discipline of law firms having to provide detailed budgets and knowing that keeping to that budget is the only route to getting paid will inevitably start to bring under control some of the more excessive cost bills which have been impacting arbitrations reputation. It also removes the ability of larger companies to seek to crush an under-resourced counterpart—for a worthy case, the resources are available.

Cameron Kelly: Legal finance is a growing industry. In an economic downturn, legal finance is rare in that it is an asset that is uncorrelated with the market. This makes it a potentially popular investment for funders currently.

As the volume of disputes increases with the number of projects increasing and the environment becoming more contentious, it is natural that legal finance will permeate arbitration matters more and more. Instead of having to fund single isolated claims, legal financiers can package multiple claims into a portfolio, which also lowers the risk. Given the number of variables in energy projects, such as price fluctuations or high infrastructure costs, there is an opportunity for multiple claims to be packaged into portfolios.

Samantha Daly and Robert Johnston: As litigation finance gains more acceptance beyond just class actions and funding law firms, the voices of the CFOs who see the economic benefits of “lightly” secured litigation finance and the positive cash flow consequences, especially when multiplied by share market valuation metrics, will become louder and more accepted by boards and their directors, especially with the increase in the extremely expensive energy sector litigation and arbitration space.

The energy sector may be targeted by litigation funders because it is an industry where the players have deep pockets—often state or federal owned corporations and large multinationals. Overall, funders have seen the value of the energy sector: High value claims, good prospects of success and a viable path to recovery against the defendant. This suggests legal financing of claims will only increase.

Are there aspects of the energy transition and potential commercial disputes related to that transition that you think are particularly relevant for corporates in the energy sector?

Mark Beeley: The energy transition offers a lot of opportunities for old disputes to feature in new technologies. Delay and defective design disputes will arise out of the construction of facilities. Production and feedstock disputes will arise out of power purchase agreements (PPAs) irrespective of what fuel is driving that power generation. Floating offshore wind developments will offer many of the same disputes as lurk around offshore drilling. The existence of new technologies and ideas is both exciting and likely to lead to failures along the way—which given the sums being invested is likely to lead to litigation and arbitration.

Paul Brumpton: Front of mind for energy corporates is the challenge of balancing their investment in the energy transition against the demands of operations and investor returns.  The numbers speak for themselves: The White & Case report found that 59% of energy companies are concerned about their ability to remain competitive throughout the energy transition.⁴ Managing shareholder activism is also perceived as a key energy transition risk, with the past two years seeing activist investor campaigns at a significant number of large energy and natural resources companies. Additionally, the ongoing effort of policymakers to incentivize decarbonization brings with it regulatory uncertainty. This is something corporates are actively monitoring because regulatory change directly impacts both their day-to-day operations and their long-term M&A strategies.

Other aspects of the transition that are particularly pertinent for energy corporates include adjusting supply chains to new policies that are being implemented across the world to support the energy transition, dealing with increased litigation risk, particularly as a result of strategic climate and rights-based litigation claims, and addressing the rights and obligations associated with the use of new technologies, as new technological solutions are not yet fully proven or are difficult to scale up.

Cameron Kelly: There are three developments related to the energy transition which companies may like to consider: First, the Climate Change Act 2022 should be front of mind for corporates with respect to how it affects their business processes and their due diligence to ensure compliance with requirements.⁵ ESG incorporates a range of factors, each of which carry different risks that businesses need to deal with.

There is also some interplay between IIAs and whether they can provide protection for foreign investors when an investment is negatively impacted by the Climate Change Act but breaches certain provisions of an IIA.

Second, the Australian Securities & Investment Commission (ASIC) and the Australian Securities Exchange (ASX) are starting to crack down on greenwashing practices. This is where companies make misleading statements that overstate their green credentials. An example of this is legal action against Santos. Santos is the first company in the world to have legal action taken against them for greenwashing, specifically in relation to claiming that natural gas is a “clean fuel”.

Third, the Task Force on Climate-Related Financial Disclosures (TCFD), which was created in 2015. The TCFD’s recommendations are yet to be mandated by ASIC, but their recommendations include organizations disclosing governance around climate-related risks and opportunities; actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning where such information is material; how the organization identifies, assesses and manages climate-related risks; and the metrics and targets used to assess and manage relevant climate-related risks and opportunities. This relates to the concept of transparent reporting from businesses so that investors and other interested parties can identify measures being taken to combat climate change.

About the participants

Mark Beeley is a partner at Orrick in London and acts as counsel in international arbitrations (both commercial and investor-state) and in litigation in the English and DIFC courts. He has particularly deep experience in energy disputes, but also regularly acts in construction, technology, insurance, shareholder, and white-collar/civil fraud matters, as part of a broader commercial practice.

Paul Brumpton is a partner in White & Case’s international arbitration practice, based in the London office. He advises clients in complex disputes and acts as an advocate in international arbitrations. He has broad experience across a number of sectors and focuses on the construction and energy industries.

Samantha Daly is a partner at Johnson, Winter & Slattery in Sydney specializing in the property, infrastructure, energy and resources industries. She acts for major miners, infrastructure providers and large developers, and advises her clients on all aspects of planning and environment regulation including planning and environmental approvals, compliance, development contributions, water, biodiversity offsets, native title, contaminated land and pollution offences.

Robert Johnston is a partner at Johnson, Winter & Slattery in Sydney specializing in large scale, complex disputes and class actions. He has been involved in many of Australia’s most high-profile commercial claims and class actions including directors' and officers' liability, professional indemnity claims, trustee cases, regulatory proceedings, most of the major multi-billion-dollar infrastructure “traffic forecasting” class actions and more recently, many of the significant shareholders' class actions.

Dr. Cameron Kelly is the General Counsel at the Australian Renewable Energy (ARENA). Prior to joining ARENA, he was in-house counsel for a major renewable energy project developer/sponsor in the Middle East, where he advised on several hundred megawatts of project financed utility-scale onshore wind and solar PV projects in Jordan, Egypt and Turkey. He has significant private practice experience in the major projects, construction and power sectors.

About the moderators

Christiane Deniger

Senior Vice President

+44 (0)20 3530 2004

cdeniger@burfordcapital.com

Christiane Deniger is a Senior Vice President with responsibility for assessing and underwriting legal risk as part of Burford’s investment team as well as for originating non-US investments. She is also a contributing author to various publications on international arbitration and third-party financing.

Matt Lee

Principal

+61 (0)2 8607 8891

mlee@burfordcapital.com

Matt Lee is a Principal at Burford with responsibility for leading its investment activity and operations in Australia and focused on working with companies, funds, investors and law firms engaged in complex commercial litigation and arbitration in Australia and abroad.