Deutsche Bank AG v Total Global Steel Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Andrew Smith,and |
| Judgment Date | 11 May 2012 |
| Neutral Citation | [2012] EWHC 1201 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: 2010–1043 |
| Date | 11 May 2012 |
[2012] EWHC 1201 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Andrew Smith
Case No: 2010–1043
Orlando Gledhill (instructed by Norton Rose LLP) for the Claimant
Claire Staddon (instructed by Millbank) for the Defendant
Hearing dates: 23, 24, 25 & 26 January 2012
Judgment Approved by the court
The claimant, Deutsche Bank AG ("DB"), claims damages of €5,781,000 from the defendant, Total Global Steel Ltd ("TGS"), for breach of four contracts made on 10, 11 and 12 March 2010 by which DB acquired from TGS through the European Union Emissions Trading System ("EUETS") for €5,737,440 a total of 492,000 Certified Emissions Reductions ("CERs"), which are instruments created under the Kyoto Protocol to the United Nations Framework Convention on Climate Change ("UNFCCC"). DB's claim is that the contracts provided that the CERs "may be used for determining compliance with emissions limitation commitments pursuant to and in accordance with the [EUETS]". They complain that the CERs that they acquired from TGS did not meet that requirement (i) because they had previously been "surrendered" under the EUETS, that is to say exchanged for allowances, and the European Commission, as regulator of the EUETS, had introduced and published in December 2009 and January 2010 a check that prevented surrendered CERs from being used for compliance purposes under it, and (ii) in any case, they argue, surrendered CERs could not legally have been so used. (I shall adopt the expression "surrendered CERs" as a convenient label, and I shall refer to CERs that have not been surrendered as "conventional CERs". I shall later have to examine what it means for a CER to be "surrendered" and in particular whether, once surrendered, it can again be so used under the EUETS.) DB's claim for damages is made on the basis that the instruments that they acquired were valueless as at 22 March 2010 (when they say damages should be assessed) or at any relevant time.
TGS deny that they were in breach of the contracts, although they accept that they supplied surrendered CERs. They dispute that they were obliged to deliver CERs that could be used under the EUETS for determining compliance with commitments. They also say that, if the contracts did provide that the instruments should be such as "may be used for determining compliance with emission limitation commitments pursuant and in accordance with the EUETS", then:
i) On the true construction of the contracts their obligation was to provide instruments that met the legal requirements of the EUETS for such use, and the surrendered CERs did so; and it is irrelevant that in fact the European Commission had introduced procedures that prevented or hampered their use; and
ii) In any case, DB have not shown that steps taken by the regulator in fact prevented such use.
With regard to DB's claim for damages, TGS:
i) dispute that the CERs were valueless at the proper date for assessment of DB's damages, which TGS submit is 15 March 2010; and
ii) contend that DB did not mitigate their loss, in particular in that DB did not move the CERs out of their account which was subject to the EUETS before 19 April 2010, when new regulations prevented them from doing so, and therefore they were unable to sell or dispose of the CERs thereafter.
The main issues between the parties are therefore these:
Liability
i) Were TGS obliged to deliver to DB under the contracts CERs that "may be used for determining compliance with emissions limitations commitments pursuant to and in accordance with" the EUETS?
ii) If so, does that term mean only that TGS were obliged to deliver CERs that met the legal requirements for such use, or were they also in breach of their obligations if procedures such as the check introduced by the European Commission in fact prevented such use?
iii) If TGS were obliged to deliver CERs that could in fact be used as specified, did the procedures introduced by the European Commission prevent this?
iv) Did the surrendered CERs delivered by TGS meet the legal requirements for the specified use under the EUETS?
Quantum of damages
v) At what date are damages to be assessed?
vi) Did the surrendered CERs have any value at the material date?
vii) Did DB fail to act reasonably because they did not move the CERs out of the EUETS before 19 April 2010?
viii) If so, did this prevent DB from reducing their loss?
The Kyoto Protocol
CERs are a creature of the Kyoto Protocol to the UNFCCC. Article 3 of the Kyoto Protocol obliges countries listed in Annex I (which are, characteristically, developed countries who have agreed to be bound by the Protocol) to ensure that their "aggregate anthropogenic carbon dioxide equivalent emissions of [specified] greenhouse gases" do not exceed their "assigned amounts" calculated in accordance with their emissions limitation and reduction commitments. The six specified gases include carbon dioxide, nitrous oxide and hydrofluorocarbons ("HFCs"). The commitments are intended to reduce overall emissions of the specified gases by at least 5% below 1990 levels in the first commitment period, which is 2008–2012.
The basic unit for measuring compliance under the Kyoto Protocol with emissions commitments is the Assigned Amount Unit (or "AAU"). Countries which have entered into commitments need AAUs corresponding with their emissions, and, if their emissions exceed their allocations of AAUs, they need to acquire from elsewhere AAUs or (as I shall explain) units equivalent to AAUs in order to meet their obligations.
Several eastern European countries, including Hungary, have large surpluses of AAUs, largely because their industries that emitted greenhouse gas have been in decline since the early 1990's, if not before. These surplus units are known as "hot air" AAUs, an expression which reflects the belief of some that the emissions of these countries will not exceed the levels to which they are committed whether or not they take action to protect the environment of the kind that the Kyoto Protocol was intended to achieve.
I have referred to units equivalent to AAUs. Article 12 of the Kyoto Protocol establishes the Clean Development Mechanism ("CDM"), under which projects may be undertaken in developing countries that reduce greenhouse emissions produced there. The reductions achieved from these projects are certified by way, in particular, of CERs. The purpose is to encourage projects to reduce greenhouse gas emissions in developing countries, where, it is thought, reductions may be achieved more readily than in the developed world. Developed countries that have entered into emissions reduction commitments meet the costs of reducing emissions generated in the developing world and thereby acquire CERs that count towards their own commitments. In effect developed countries that so acquire CERs take credit under the Kyoto Protocol system for emissions reductions elsewhere, and thereby can meet their commitments without themselves reducing emissions of greenhouse gas as they would have to do otherwise.
Another unit that can, subject to specified limitations, be deployed under the Kyoto Protocol as an equivalent to an AAU is an Emissions Reductions Unit ("ERU"), which is a creature of the so-called Joint Implementation Mechanism. (CERs and ERUs are sometimes referred to as "Joint Implementation Credits".) This provides for credits for emissions reduction projects in developed countries with Kyoto Protocol commitments.
Most of the CERs that DB acquired from TGS (some 94%) derived from projects in India, China and Korea for reducing emissions of HFC-23, a powerful greenhouse gas. However, for reasons which are immaterial for present purposes, the supposed environmental benefits from projects to reduce HFC-23 emissions are controversial, some emissions reduction schemes do not recognise units relating to HFC-23, and the European Commission announced a decision in November 2010 that from May 2013 it will not recognise HFC-23 units under the EUETS. A small number of the units acquired by DB from TGS (some 4%) derived from nitrous oxide decomposition projects in Korea and China: the European Commission, for similar reasons, also decided not to recognise such units from May 2013.
EUETS
The EUETS is one of the primary mechanisms by which the European Union and its member states seek to meet their obligations under the Kyoto Protocol. It is a "cap-and-trade" system, that is to say a system under which the relevant authorities set an overall "cap" on emissions and require those covered by the policy to keep their overall emissions within the cap and to surrender allowances corresponding to their emissions. Allowances are transferrable and may be bought by those whose emissions exceed the allowances that they have. Thus, allowances are traded, not only by those who are obliged to limit their emissions but by brokers and other intermediaries.
The EUETS is designed to work in conjunction with the system established by the Kyoto Protocol, but it is a separate trading system. The Kyoto Protocol system binds states to keep emissions of specified gases emanating within their borders within agreed limits. On the other hand, the EUETS requires "operators" which themselves emit the gas, typically large industrial concerns, to keep within limits emissions of specified kinds. Until 2013 the EUETS is concerned with only carbon dioxide, although thereafter it will be directed also to nitrous oxide and perfluorocarbons.
Mr Daniel Radov and Ms Elizabeth Bossley, who gave expert evidence for DB and TGS respectively, agreed that the EUETS is the largest market for emissions credits, measured both by volume of...
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