This annual conference, held on 22 November, was chaired by partner and global head of our insurance disputes practice, Paul Lewis, and explored some key legal and compliance risks facing major corporates in the current global environment, and how those risks can be mitigated.
Sessions looked in particular at risks relating to climate change in commercial relationships, the disputes implications of the war in Ukraine, the current landscape for class actions in the UK, and how to deal with the risks arising from emerging tech and IT disputes.
Climate change risk in commercial relationships
Climate change considerations and the move to decarbonisation have added complexity to how businesses operate and given rise to a significant potential for claims to arise between commercial counterparties.
M&A and finance
In the M&A context, companies considering potential acquisitions will wish to consider the environmental impact of the target business and what that might mean for any climate-change related objectives they have set or public commitments they have made. Increasingly buyers are looking to spell out their expectations about emission levels and environmental impact in warranties and indemnities, and sellers will want to be cautious about what they are promising and how any impacts may be measured.
Banks are increasingly inserting covenants into finance documents relating to climate change mitigation and adaptation. This reflects a concretization of more general ESG-related covenants included in concessional finance documents involving multilateral development banks in what was originally development finance. As public and private sector finance come together in relation to climate-related projects (say, a renewable energy project in a low to middle income country), we are seeing more climate-specific covenants being introduced. This trend is likely to continue as this blended finance becomes more established, especially where accredited implementing entities and institutions, and multilateral climate funds, are involved and introduce emissions-related undertakings and oversight.
The relevant agreements may provide for audits of the underlying projects, and if the project fails to meet its targets (eg because the energy is not as green as it was meant to be) it could give rise to claims between project participants and/or stakeholders.
Construction and planning
Another major area is construction and planning, as market players are under pressure to get new green projects off the ground quickly, or to rush through adaptations to existing projects to reduce their carbon footprint or adapt the relevant infrastructure to fast changing weather conditions. Disputes may arise if a design ends up not being fit for purpose or fails to meet the specifications required to attract subsidies.
The impact of climate change also gives rise to challenges in the drafting of construction contracts. To give one example, the increasingly unpredictable weather patterns caused by climate change can make it difficult to set an appropriate level beyond which rainfall will be considered unforeseeable, such that risk can be allocated appropriately. Standard form construction contracts can have varying approaches which contractors and employers alike should be aware of.
Many jurisdictions have put in place corporate reporting obligations around emissions impact, and many companies are publishing decarbonisation and net zero plans. These increasingly require reporting on not only the direct emissions which result from a company's own activities but also the indirect emissions which occur in its value chain, including both upstream and downstream emissions.
This makes it essential for companies to be aligned with suppliers as to standards of reporting and how the information will be verified. There is an obvious potential for disputes if this goes wrong, either through errors or deliberate misstatements. Disputes may arise as to both the standard of liability, eg whether it is an absolute obligation or subject to best or reasonable endeavours, and as to how far liability for errors extends along the supply chain.
Parties entering into joint ventures or collaboration agreements may have very different goals relating to decarbonisation and climate change mitigation. And even if their goals are aligned they may have different attitudes as to what they are willing to do to achieve those goals or how quickly. This issue may be particularly acute where regulation sets a big picture objective, like emissions reduction, but is not prescriptive as to how that objective should be achieved.
Disputes may arise as to how the costs of climate change compliance, or of measures which go further than the strict regulatory requirements, should be allocated between joint venture parties. A party may also find that, as a result of changing regulation, a project is not as profitable as had been envisaged and so may seek to renegotiate the agreement or even back out.
The changing cultural and regulatory landscape around climate change issues may also have an impact on how objective standards are assessed, such as an obligation to act as a reasonable and prudent operator
Parties should bear in mind the potential long-tail disputes risk where they dispose of corporate assets which may be said to give rise to dangers to third parties. In a case a couple of years ago the Court of Appeal found that a seller of a tanker owed an arguable duty of care to the widow of a man killed in breaking up that tanker in a Bangladeshi shipyard, where the seller knew it was likely to end up being broken up in unsafe conditions.
The question arises whether the disposal of carbon generative assets could give rise to a similar ongoing tort risk, particularly if the seller is aware that the buyer is likely to manage the assets in a way which does not comply with climate related regulation.
Other contractual terms
Carbon impact is increasingly being included as a factor in choice of supplier or tender conditions when projects are bid for. Where a business has committed to meeting a certain emissions standard as a condition of getting access to the business, disputes may arise if that standard is not met, and those disputes may extend further where the failure is the fault of another business up the supply chain.
There is also the potential for contractual termination rights to be tied to carbon footprint or emissions levels. This may lead to complex disputes, particularly if the contractual provisions are not back to back.
Shareholder claims in the climate change space tend to run into difficulties in establishing causation and loss.
So far, we have not seen a successful derivative claim in the English court relating to climate change commitments. Earlier this year, the High Court dismissed a derivative claim brought against the directors of the Universities Superannuation Scheme for failing to satisfy climate change commitments – specifically, for failing to create a disinvestment plan for fossil fuel investments: McGaughey v Universities Superannuation Scheme Ltd  EWHC 1233 (Ch). That claim faced the obvious difficulty that, in the current environment, fossil fuel investments are very profitable and therefore it is difficult to argue that investing in such assets is a breach of duty, bearing in mind the directors' duty to maximise investment returns for the pension scheme as a whole.
ClientEarth has attracted a lot of publicity with its announcement that it has acquired shares in Shell for the purpose of launching a derivative claim. It is said that the directors are in breach of duty in failing to prepare the company properly for the net zero transition, putting its long-term value in jeopardy. But again there are likely to be formidable obstacles in establishing causation and loss.
To date we have not seen a claim under section 90A of the Financial Services and Markets Act 2000, in relation to false statements or dishonest omissions in published information by an issuer of securities, which is based on statements relating to climate issues. That may be because corporate statements in this area tend to be phrased in aspirational and rather vague terms, so that proving falsity is difficult, as well as the hurdle of establishing dishonesty or recklessness.
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