Oil & Gas: Court of Appeal dismisses challenge to LNG Project funding

In R (on the application of Friends of the Earth Limited v (1) The Secretary of State for International Trade / UK Export Finance (UKEF) (2) Chancellor of the Exchequer; interested parties (1) TotalEnergies E&P Mozambique Area 1 Limitada; (2) MOZ LNG1 Financing Company Limited [2023] EWCA Civ 14, the Court of Appeal unanimously dismissed Friends of the Earth’s challenge to a decision of UK Export Finance (“UKEF”) to provide up to USD 1.15 billion export credit support in relation to a USD 20 billion Area 1 liquefied natural gas (“LNG”) facility in Mozambique.

In refusing to overturn the decision, the Court of Appeal took a narrow view of the standard of review required to be implemented by public authorities, confirming there is a substantial margin of appreciation afforded to them in the exercise of their “multifaceted” decision making process.

Facts

A summary of the facts and the decision of the High Court can be found here - Oil Gas Court challenge to LNG Project funding (cms-lawnow.com).

Following a High Court dismissal of a judicial review challenge to the decision of the First Defendant, UKEF, supported by the Second Defendant, the Chancellor of the Exchequer, to provide up to USD 1.15 billion in export finance and financial support in relation to an LNG project in Mozambique, the Claimant, Friends of the Earth (“FoE”) appealed to the Court of Appeal.

In summary of UKEF’s purpose, it exists (under statutory delegated powers) to ensure that no viable UK export fails for lack of finance.^[1] UKEF provides no finance for investment itself, nor does it have any net cost to the taxpayer; instead it operates like a financial institution, carrying out banking and insurance business in support of UK exports.

The UKEF investment decision that FoE challenged was UKEF’s decision to provide up to USD 1.15 billion in export finance and financial support to a development of offshore deepwater gas production facilities, 50Km from the coast of Northern Mozambique, connected to an onshore gas receiving and liquefaction facility (the “Project”). The Project is operated by Total E&P Mozambique Area 1 Limitada and financed by MOZ LNG1 Financing Company Limited, who both appeared in FoE’s judicial review proceedings as interested parties, making submissions in common cause with the two Defendants.

The Issues

The question at issue was whether the UK Government had acted unlawfully in approving UKEF’s investment in the Project. The Divisional Court had been split in its view (with Stuart Smith LJ dismissing UKEF’s application, and Thornton J indicating that she would have allowed the application), resulting in FoE’s application being dismissed.

FoE appealed to the Court of Appeal on the following three grounds:

1. The respondents were required to adopt a view that was more than merely “tenable” as regards whether UKEF’s decision was aligned with the UK’s obligations under the Paris Agreement.
2. There was no rational basis upon which the respondents could conclude that the investment decision was compatible with the Paris Agreement.
3. The respondents failed in their duty of enquiry; UKEF’s climate change report in relation to the project did not contain a quantification of the project’s scope 3 emissions^[2] arising from the use of LNG that would be produced by the Project (the Project would produce 805 million tonnes of CO2 over its lifetime, using 0.1-0.2% of the world’s remaining carbon budget – this was not set out in UKEF’s climate change report).

In response to these contentions, the respondents submitted that the Paris Agreement is an unincorporated international treaty, but one that in any event the decision to fund the Project was in compliance with.

The respondents asserted that, as an unincorporated treaty with no legislative foothold in domestic law, the Paris Agreement did not give rise to a legally enforceable right. In this regard, there is no jurisprudence as to the precise legal meaning of the Paris Agreement. As such, questions as to the interpretation of an unincorporated treaty were for the public authority itself to determine, and decision-makers could not be challenged if they adopted a tenable view as to a point of unincorporated international law. 

Decision

The judgment of the Court of Appeal was delivered by Sir Geoffrey Vos MR.

“Tenable”

As a starting point, the Court of Appeal was of the view that the obligations imposed by the Paris Agreement, whilst more than merely aims and aspirations, were not “hard-edged obligations that one might more commonly expect to find in a commercial agreement to be interpreted under domestic law.”

The Court of Appeal agreed with the respondents that the Paris Agreement is pre-eminently an unincorporated international treaty which does not give rise to domestic legal obligations. Whilst the question of whether funding the project was aligned with the UK’s international obligations under the Paris Agreement was justiciable, the Paris Agreement was only one of a range of factors to which the respondents determined to have regard in reaching the decision.

As such, the Government was only required to reach a “tenable” view that funding the project was aligned with the UK’s obligations under the Paris Agreement. If it was tenable, the court should not and could not hold that an error of law had been made. In respect of this test the reasons why the decision, in this case, is to be judged by the “tenability” standard, rather than the “correctness” test, can be summarised briefly as follows:

1. The respondents in this case chose, but were not compelled by domestic law, to take into account the UK’s obligations under an unincorporated treaty that formed no part of it.
2. There is a lack of clear guidance as to how unincorporated treaties like the Paris Agreement should be construed as a matter of domestic law.
3. The Paris Agreement, therefore, was one of a range of factors to which the respondents decided to have regard in reaching the decision. It is not for the courts to allocate weight as between competing factors. Moreover, to make it necessary for the domestic courts definitively to construe unincorporated treaties every time the executive decided to have regard to them in making decisions would be problematic and unworkable.
4. The fact that the respondents said they had concluded that their decision was compliant with the UK’s obligations under the Paris Agreement does not affect this conclusion. It must be open to the executive to say that it wants to comply with an unincorporated treaty, even though there may be different views as to what precisely it means. It must also be able to say, without successful challenge, that it thinks on balance and in good faith that a particular decision is compliant, even if it later changes its policy or is shown to have been wrong in the view that it took.

In this instance, UKEF’s view was a tenable one. The fact that UKEF had expressly stated that its decision making was compatible with the Paris Agreement obligations was not relevant to the issue of tenability. The Court of Appeal held that it must be open to decision makers to say that they wish to comply with an unincorporated treaty, even if there are different views as to its meanings. Further, it must also be able to say, without successful challenge, that it thinks on balance and in good faith that a particular decision is compliant, even if it later changes its policy or is shown to be wrong in the view that it took.

“Rationality”

The Court of Appeal did not agree with FoE that it was irrational for the Government to conclude that the investment decision was compatible with the Paris Agreement. The Scope 3 emissions were always fully understood to be significantly larger than the Scope 1 and 2 emissions, albeit there was significant uncertainty as to the Scope 3 emissions that the Project would produce, however, it was not clear to what extent the project would continue to fossil fuel transition – in fact, an overall net reduction in emissions was a possibility at the time the decision was made. It could not, therefore, have been irrational for the respondents to decide to provide finance for the project, when they were being advised that the project could, in some scenarios, align with the UK’s obligations under the Paris Agreement.

“Duty of inquiry”

Finally, the Court of Appeal found that UKEF had not breached its Tameside Duty to “ask the right question and take reasonable steps to acquaint himself with the relevant information to enable him to answer it correctly”.^[3] It is for the decision maker to decide upon the level of inquiry to undertake, as long as they amount to reasonable inquiries). UKEF’s inquiries were well within the margin of appreciation afforded to decision makers.

The Government was not required to obtain a quantification of the indirect Scope 3 emissions occurring in the project’s value chain in making the investment decision. In fact, the project was going ahead whether or not UKEF contributed to its financing. The decision was, therefore, not one that could have reduced or avoided the project's Scope 3 emissions.  

As such, the Court of Appeal dismissed FoE’s appeal.

Comment

This decision adds to a growing trend of UK court decisions in declining to find that emissions-intensive energy projects are unlawful on the basis of their environmental impact alone. As was the case in the Divisional Court, Sir Geoffrey Vos MR stressed that the Court of Appeal’s judgment was not to be construed as supporting or opposing any political view of the issue in dispute - instead the only task was to establish whether there was an error of law at play.

The Court of Appeal’s decision should give some comfort to those investing in large public-finance supported energy transactions as regards the English court’s interventions in decision making where decisions have an environmental impact.

As regards UKEF, in March 2021, the UK Government issued its Guidance: Aligning UK international support for the clean energy transition, which set out the detail of the new policy. The guidance said that the UK Government would  “no longer provide new direct financial or promotional support for the fossil fuel energy sector overseas” other than in limited circumstances. It was expressed to apply to both Official Development Assistance (or “ODA”) and UKEF support.

However, for other bodies, of particular note in the Court of Appeal’s judgment is the following paragraph:

“Friends of the Earth's argument that the respondents had, in effect, to show that their decision was compliant, as a matter of law, with the UK's obligations under an unincorporated international agreement like the Paris Agreement points strongly, in our judgment, to the appropriateness of the tenability test in these circumstances. The compliance question is hugely complex as the CCR demonstrates. It is beset by uncertainties as to future events that were not and, in many cases, could not be known. It would be unworkable and impracticable if the Government could only make such a decision if it were able to demonstrate that its view of the factual and legal position was correct. In fact, the decision-makers knew that there were possible legal challenges whatever it decided.”[Emphasis added]

Indeed, it seems inevitable that there will be further legal challenges in the public and private sectors as regards project financing decisions that appear to be in conflict with climate change goals (whether linked directly or indirectly).  In this regard, there is likely to be some hesitance or caution on the part of government bodies to support or consent to projects, or provide financing to projects, where there is (or may be) a potential for negative environmental impact.

In addition to the spate of judicial reviews against UK Government financial support and consents, NGOs are also using company law to target the actions of directors responsible for investment decisions. Examples include recent news that directors of an international oil company are to be sued in their personal capacity by ClientEarth for a failure to devise a strategy in line with the Paris Agreement, in alleged breach of directors’ duties under the UK Companies Act.

It is apparent that activists and interest groups will continue to use the ‘hook’ of (i) the need for government consent and (ii) directors’ duties to attempt to seek to prevent projects in the energy sector from being sanctioned. As part of this strategy, judicial review, anchored to the Climate Change Act 2008 and the Paris Agreement, will continue to be used as a mechanism to hold the government and public bodies to account, and to call into question governmental approvals, consent or support for energy sector projects with an alleged environmental impact. Whilst this decision should provide some reassurance that the English courts will not seek to intervene in the decision-making of public bodies that have a negative environmental impact where it is not legally necessary to do so, it will likely do little to ‘turn the tide’ against activist legal challenges in this arena.

Judges:

Sir Geoffrey Vos, Master of the Rolls

Lord Justice Bean

Sir Keith Lindblom, Senior President of Tribunals

Reference:

R (on the application of Friends of the Earth Limited v (1) The Secretary of State for International Trade / UK Export Finance (UKEF) (2) Chancellor of the Exchequer; interested parties (1) TotalEnergies E&P Mozambique Area 1 Limitada; (2) MOZ LNG1 Financing Company Limited [2023] EWCA Civ 14