Construction, energy and engineering companies have lagged others in taking steps to protect themselves from the growing number of cyber-attacks, and failing to take preventive measures can lead to expensive litigation.
Limitations on the use of red diesel for the construction and engineering sectors UK.
Glasgow and COP26 resulted in various commitments from global economies to work towards targets in the reduction of greenhouse gas emissions. The UK is to target the reduction of greenhouse emissions to net zero by 2050.
However, even prior to COP26 there were already legislative changes afoot to have cleaner air. The Finance Bill 2021, and the associated secondary legislation, as part of the government’s plans to reduce carbon emissions, has the effect of restricting the usage of red diesel after April 2022.
What is red diesel? In short it is regular (white) diesel that is dyed to make it identifiable. Why? It is taxed at a much lower rate, making it almost 50 pence a litre cheaper than white diesel. That discount will end for those industry sectors that have used it, but are now restricted from its usage post April 2022.
Construction and manufacturing industries cannot use red diesel after April 2022. These are sectors that use the rebated red diesel. In the construction industry, site electricity generators along with heavy plant, machinery and heavy vehicles will all now be forced to run on white diesel to a much higher cost.
There is pressure on all industry sectors to adopt green measures. This is now increasingly becoming the norm, and is affecting virtually all businesses and sectors. By way of illustration, Lloyds Bank has announced that in relation to green homes, when looking at affordability there will less stringent stress testing.
The governments stated aim is to encourage businesses affected by the red diesel restrictions to use less fuel, or eventually to adopt greener alternatives. However, few in the construction industry would use more fuel than absolutely necessary, so in order to avoid cost inflation, there needs to be alternative options that the construction and engineering sectors must have.
So have we got the alternative technology to give viable options? For example, electric powered plant or cleaner fuels such as hydro treated vegetable oil. Is there scope for future use of Hydrogen power? As we have previously discussed in this blog, significant strides have been made in this area to date and there are a number of construction vehicle suppliers now providing a broad range of electrically-powered construction machinery. However, despite this, diesel power is still dominant in the sector and in some areas there are few, if any, alternatives available.
For the construction, engineering and energy sectors, the following points arise for consideration and debate:
- Super inflation in the construction, engineering and energy sectors is a massive issue in the UK, and indeed in other parts of the world. Rising supply costs and increased energy prices have dogged the industry in 2021. This loss of rebate is likely to result in yet further increases to site and project costs. In turn this is likely to increase the pressure on the bottom lines of many companies in the sector, and is in turn likely to mean more expensive houses, hospitals, schools, road projects and so on. This is a pertinent issue in the UK in particular, given the shortage of affordable housing and the current issues surrounding the state of disrepair of some of the housing stock in inner cities.
- Against this, the government is not forecasting significant macroeconomic benefits in terms of increased tax revenue – meaning that a government already short of cash thanks to the Covid-19 pandemic will likely have to pay more for its construction projects, with no substantive additional money coming in against which to offset that cost.
- Concrete processing plants will be affected by steep cost rises. To state the obvious, concrete is a key ingredient on any construction project, and is the most widely used material in the world!
- It is being reported that in Northern Ireland the cost to construction businesses could be as much as £25M per year.
- Plant and machinery that is no longer eligible to use red diesel must be drained, flushed and cleaned. Furthermore, any usage outside the permitted circumstances may result in confiscation of plant and machinery. In practice this may create a significant administrative burden on companies in the short term.
- Whilst the industry accepts the need to embrace green practices to strive towards net zero carbon emissions by 2050, some argue that the changes being implemented are possibly too soon, and before alternative fuels and/or technologies are in place.
- Have we actually got readily available alternative green options? At present, is the only viable option arguably to switch to white diesel only, and if so, does that really reduce the carbon emissions from the usage of red diesel? In reality the answer is no, unless a cleaner source of fuel is available. This in turn leads to a need for potential machinery modifications to accommodate such fuels. Additionally, problems may grow for plant hirers when machinery is hired consecutively by unaffected and then effected industries. Plant and machinery in the construction industry, often represent considerable assets of a business. If the idea is that these will become obsolete, this will present further problems for the sector.
- The government’s thought process, on the other hand, appears to be that necessity is the mother of invention, and increasing fuel costs will drive down emissions created by the construction industry.
- Those in the industry cannot be expected to absorb these costs, and the inevitable effect will be that these additional costs of running plant machinery, concrete manufacture and quarry operations, to name a few, will need to be passed onto the end users.
- As with all cost increases there will inevitably be considerable impacts on current projects. For contractors bound into contracts that prohibit price changes or increases for these matters, this change alongside the current price hyperinflation dogging the industry could prove fatal.
- Equally, increased fuel costs and price hyperinflation will increase the uncertainty around tendering for work. Prospective contractors will need to consider carefully the risks posed by these cost increases and how they are likely to be affected in the long term.
 Rail transport, agricultural, fishing and water freight, amateur sports clubs, golf courses, non-commercial power generation, traveling funfairs and circus.
 The Sunday Telegraph, 23 January 2022. This on basis that green homes are more efficient to run, and there will be lower outgoings.
 BBC News 24/01/2022-Red Diesel loss ‘could cost businesses millions’
The ongoing fall out from the Achmea Decision
At the end of last year we wrote an article about the impact and uncertainty caused by the Achmea case on investor state dispute settlement provisions contained in intra-EU Bilateral Investment Treaties. We wrote about the likelihood of further cases that would either give clarity or create further uncertainty. The saga continues.
In the Achmea case the Court of Justice of the European Union (ECJ) held that Article 8 of the Netherlands – Slovakia bilateral investment treaty, which allowed for the resolution of disputes by way of arbitration, was incompatible with EU law. The rationale for the decision was that a tribunal may have to interpret or apply EU law and where a question of law arose, unlike a Member State court, that question of law could not be referred to the ECJ. In other words, intra-EU bilateral investment treaty arbitration provisions, as reasoned by the ECJ, deprived the EU courts of jurisdiction in respect of the interpretation of EU law.
We raised the prospect that the ramifications from the decision were potentially far reaching and were not, it seemed, confined to the BIT between Netherlands and Slovakia.
We reasoned that the possible conclusion for intra-EU investment treaty arbitrations, it seems, is that tribunals may have to begin to accept the inevitable, which is to say that they may no longer have jurisdiction to deal with disputes arising from claims under intra-EU investment treaties. Even if the tribunal concludes that it has jurisdiction to hear a dispute, following the Raiffeisen Bank case it is likely that there will be a real risk that the arbitration will either be dismissed by a domestic court of a member state of the EU, or possibly that any potential award is likely to be unenforceable within the EU, albeit that questions remain regarding enforceability of awards in jurisdictions outside the EU in say, the US or the UK.
However, less obvious is the impact of the Achmea case on multinational or multilateral investment treaties which may involve signatories from various EU member states as well as countries outside of the EU. For example, can an investor from an EU member state commence an arbitration against another EU member state pursuant to the dispute resolution provisions of multinational investment treaty simply because that treaty has signatories that include countries from jurisdictions outside of the EU.
This particular issue has been playing out over the past few years in the context of the Energy Charter Treaty (ECT) and in two particular cases.
The Rockhopper Case
In 2015 the Italian Parliament re-introduced a ban on oil and gas exploration within 12 miles of the Italian coastline. The ban had previously been introduced in 2010 but revoked in 2012.
In 2017, Rockhopper Exploration Plc (based in the United Kingdom), along with its Italian subsidiary, filed a claim for compensation alleging violations of the investor protection provisions of the Energy Charter Treaty. The case is Rockhopper Italia SpA, Rockhopper Mediterranean Ltd. and Rockhopper Exploration Plc v. Italian Republic in the International Centre for Settlement of Investment Disputes (Rockhopper).
The claim concerned interests of the Rockhopper Corporation in the Ombrina Mare oil rig, for which it was hoping to obtain a production concession from the Italian Government prior to the introduction of the ban. The company is claiming compensation both for funds spent and for anticipated profits, which may run to USD $200-300 million.
Around June 2019, Italy invited the tribunal to recuse itself on the basis that it lacked jurisdiction following the Achmea decision, which barred in intra-EU arbitration emanating from bilateral investment treaties. The tribunal rejected Italy’s position on the basis that the Achmea decision had no application to the ECT (in other words it was limited to the specific circumstances of that case) which is a multinational or multilateral investment treaty that includes nations outside of the EU. The tribunal concluded that in any event, the dispute involved Italy’s alleged breaches of the ECT and the application of public international law. EU law, the tribunal reasoned, had no application to the present dispute.
Fast forward two years to September 2021, and the issue of the Achmea case and the ECT resurfaced in the case of Moldova v Komstroy LLC (Moldova) which was referred to the ECJ. Initially the case was about the interpretation of the term “investment” under the ECT. However, several member states urged the ECJ to also rule on the issue as to whether the arbitration provisions in the ECT are compatible with EU law.
Unsurprisingly the ECJ ruled that the ECT’s arbitration provisions fall foul of EU law to the extent that the dispute involves an investor from an EU member state suing an EU member state. The ECJ relied once again on the rationale of the Achmea case i.e. that such tribunals deprived the EU courts of jurisdiction in respect of the interpretation of EU law.
Following the ECJ’s decision in the Moldova case, towards the end of 2021, Italy urged the tribunal in the Rockhopper case to reconsider its previous 2019 decision (as above) and recuse itself for lack of jurisdiction.
The tribunal once again rejected Italy’s position although the reasons for the decision are not yet available. One suspects that the tribunal may have continued to rely upon the fact that the dispute does not involve the application of EU law and that the ECT, which forms part of public international law, cannot simply be ignored by Italy.
The ECJ’s position is problematic and to some extent devoid from reality.
For example, one of the main issues with the ECJ’s conclusion in Moldova is the creation of a two tier system in respect of the ECT. Where the dispute involves an EU member state and the investor is from outside the EU, that investor can rely upon the full benefit of the arbitration provisions in the ECT whereas an investor from within the EU cannot (according to the analysis of the ECJ). No such two tier system has been expressly provided for in the ECT.
Secondly, treaties such as the ECT amount to something that is akin to an international contract. The signatories are required to perform their obligations in accordance with the rules of such treaties and the arbitration provisions provide a mechanism for investors to enforce their rights. A dispute of this nature involves the application of international law and the terms of the ECT.
At present it appears that arbitral tribunals appointed pursuant to the ECT seem to agree and will for the time being reject any arguments, based upon the Achmea case, regarding their jurisdiction as evidenced by Rockhopper.
While that may give some degree of the comfort to investors, questions remain about the enforceability of the awards. It is no good for an investor taking the time and no doubt significant expense in concluding an arbitration under the ECT only to find that the award will not be enforced. Based upon the position adopted by the ECJ in Achmea and the German Supreme Court in Raiffeisen Bank it seems inevitable that an investor will not be able to enforce the award within a member state of the EU.
However, it remains to be seen how jurisdictions outside of the EU will react, most notably the US. If a tribunal has concluded that it has jurisdiction under a multinational treaty like the ECT and an award is issued, on what basis should jurisdictions outside of the EU concern itself with decisions of the ECJ, like Achmea, when enforcing awards. International treaties such as the ICSID and the New York Convention suggest that decisions of the ECJ should have little baring and the award should be enforced. This remains an open ended issue and only time will tell how jurisdictions outside of the EU will react to the enforcement of awards.
Looking at the Achmea decision in the context of the global energy crisis, the cost of fuel and other energy prices for industry and the public has been in the news over many months. The effect of these fluctuations in energy prices may have contributed to the super-inflation in prices impacting various sectors including construction. It’s not surprising that there will inevitably be disputes or referrals to arbitration concerning energy tariff agreements and the like. The importance of the ECT is ever more relevant for global trade deals in this sector. Preserving the ability of parties to rely on ECT to resolve disputes is an international trade issue, and any decision that effects the ECT may have serious ramifications for EU trade. For reasons of international trade relations there may also be good policy reasons for distinguishing international trade agreements, such as the ECT, from intra- EU treaties.
The Achmea decision continues to cause uncertainty. At this stage it seems a step too far that the decision can impact upon multilateral treaties such as the ECT by removing the jurisdiction of tribunals in intra-EU disputes. In the author’s view that is to be applauded, parties who have agreed to submit disputes to arbitration should not be able to unilaterally retract that agreement. Nonetheless this is unlikely to be the end of the saga, and it will be interesting to see how this issue continues to unravel.
Vijay K. Bange (Partner)
Matthew Friedlander (Senior Associate)
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