Litigation in transition: Energy sector disputes and the role of legal finance

According to recent data, companies in the energy sector are 56% more likely than companies in other industries to spend more than $15 million on litigation or arbitration in a year.

The energy transition presents both opportunities and challenges, and as businesses engage in meritorious disputes that arise in its wake, legal finance will play a crucial role.

M&A and joint venture disputes

The cost and time associated with developing new projects and technology typically require collaboration between companies connected by a web of contractual rights and obligations. Joint ventures are commonly used to bring together businesses with different strengths to drive innovation and commercialize solutions on a larger scale. However, as highlighted by respondents in a recent Queen Mary University and Pinsent Masons study, JV activity can give rise to disputes.

As Dr. Cameron Kelly, General Counsel at the Australian Renewable Energy (ARENA), explained: “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.”

In both M&A and JV contexts, disputes are likely to arise in relation to indemnities and breaches of representations and warranties relating to the environment, as well as clashes in approach between market participants from diverse backgrounds. These obligations and rights inherent in JVs often result in friction among stakeholders and the potential for disputes.

One high profile example of a JV dispute was the BP and TNK-BP dispute, a 50-50 venture between BP and AAR, a consortium made up of four Russian billionaires. The dispute arose out of differing visions for the company’s corporate governance and future strategy. This case illustrates some of the issues that can come up when companies merge or partner together.

Decommissioning disputes in the construction industry

The energy transition has led to a significant increase in decommissioning projects for oil and gas assets that have reached the end of their lifecycles. In the Gulf of Mexico, there is a projected $24.3 billion market for construction contracts to decommission deepwater structures.

Additionally, Southeast Asian offshore fields are expected to require decommissioning worth $30 billion to $100 billion by 2030. In the North Sea, more than £20 billion in spend is needed for decommissioning energy installations over the next decade.

Decommissioning projects come with inherent risks. As Partner at White & Case, Paul Brumpton, said “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.”

Each asset is unique, and many oil and gas assets are in remote or hazardous areas, posing challenges for workers. The execution of decommissioning projects can give rise to various legal risks commonly associated with construction, such as delays, cost overruns, scarcity of skilled labor and health and safety concerns. These factors reflect the complex nature of decommissioning projects and will inevitably lead to more disputes for companies in the construction sector. Companies like Shell, ExxonMobil, ConocoPhillips, BP and Chevron all have faced disputes over the decommissioning of oil fields and related infrastructure.

IP disputes from energy transition innovations

Most of the technological innovation required to meet the needs of the energy transition is expected to come from private sector development of intellectual property, and businesses will likely be required to enforce their IP through litigation in order to protect their investments in research and development.

The energy transition has already generated significant IP. Wind power companies hold patents for wind turbine design, manufacture and operation. The continued growth of the electric vehicle industry has also led to patenting in areas such as batteries, motors, controllers, chargers, charging infrastructure, wireless charging and testing equipment.

Some energy sector players may not have the ability or internal resources to innovate at the required speed, so they may look to commission or develop technology in collaboration with a third party, such as a technology company with limited experience in the sector. These collaborations may be completed under pressure due to the urgency of the transition and the value of being an early mover. This may lead to disputes, as the parties may have different expectations regarding the outcomes and ownership of the output.

There may also be disputes around the licensing of technologies, including the scope of licenses, royalties payable where one party owns the IP but licenses it to another, and breaches of license terms.

These disputes are high stakes, Lex Machina has tracked numerous IP cases in the energy sector where damages awarded exceeded $100 million between 2010 and 2019, reflecting the high value of energy-related patents and technologies. And as the pace of technological innovation picks up, the volume of related disputes will only increase.

Companies can navigate the legal costs of disputes through legal finance

When a company has been harmed, pursuing a claim may be the only path to recovery — but it is an expensive and risky one. Disputes pose a binary risk of either winning or losing—making them a high-risk investment for businesses. Legal costs can deplete resources and take years to resolve, harming profitability.

As disputes resulting from the energy transition continue to rise and key issues become more contentious, parties involved are increasingly considering legal finance as a viable option. In fact, a recent survey found that 84% of respondents believed there would be an increase in third-party funding for energy-related disputes.

As Samantha Daly and Robert Johnston, partners at Johnston, Winter & Slattery, recently said: “As litigation finance gains more acceptance… 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.”

In its simplest form, legal finance involves providing upfront capital to cover legal fees and expenses in exchange for a portion of the future proceeds of the claim. This arrangement is typically non-recourse, meaning the claimant is not obligated to repay the legal finance partner if the case is unsuccessful.

Another application of legal finance that is gaining popularity among businesses, particularly in the energy sector, is monetization. This involves advancing working capital based on the future value of pending claims. By leveraging legal finance in this way, companies can not only mitigate the risk associated with pending claims but also reallocate valuable resources to core business priorities. Businesses know how to generate profit and growth from investing in their core operations; spending on litigation is not profit-generating.

When seeking a legal finance partner, companies should prioritize those with deep expertise in financing high-risk disputes. While the client retains control over strategy and settlement decisions, an experienced finance partner can provide valuable insights on case strategy, damages methodology and judgment enforceability.