By Stuart Carson, Associate in the Commercial Litigation Department at Stewarts Law
Some of the impacts of the dramatic fall in the price of oil are evident: for the first time in more than five years the price of petrol has fallen below £1 a litre at filling stations. But it is not just drivers who can smile for a change. Airlines are cutting fuel surcharges and domestic energy bills are coming down – although not by as much as we would all like. And it’s all thanks to cheaper oil.
But where there are winners there are, inevitably, losers. The Treasury is losing a fortune in oil tax revenue, raising fears that they will have to find the money elsewhere. Oil companies are tightening their belts and cutting back on investment in exploration and extraction. And, with share prices across the sector falling, a huge number of investors have taken a big hit.
What isn’t so obvious is the impact on some other very serious players in the world of business and finance. The price of oil is used as a benchmark for trillions of dollars of securities, derivatives and contracts. Those who didn’t see the oil crisis coming are facing astronomical losses.
When big money is lost, the affected parties all too often turn to their lawyers. London’s commercial courts are where some of the losers may be heading to mitigate their losses – being a favored forum for litigating commercial claims due to the prevalence of English law clauses and the readiness of the courts to hear international disputes.
It is fair to say that few people expected oil to plummet so far. Already we’ve seen firms cashing out billion dollars in hedges in a gamble that oil prices would go back up. They didn’t. Such losses could well give rise to potential claims against a raft of professional advisers.
But on what grounds? Broadly speaking, professional negligence claims arise when an adviser hasn’t performed the duties they owe to their client and, in reliance on their advice, the client suffers loss. This could include a failure to warn of the risk of a dramatic fall in oil prices, but only if this was foreseeable. In circumstances where the oil price has fallen by 60 per cent since mid-June (a six year low), whilst the extent of the losses may not have been foreseen, it might be arguable that the occurrence of it was.
Breach of Contract
Often oil producers have to lock in prices years in advance in order to meet lending criteria and, equally, many oil dependent businesses lock in prices early to factor in any price shocks. Whilst such oil producers are in a comfortable position right now, the parties on the other side of those contracts may be paying more than double the current price of a barrel of oil and, as such, looking to find technical escape routes for terminating onerous contracts.
Major airlines and domestic energy companies are a good example of this – EasyJet is reported to have already bought more than 80% of its fuel for this year at high 2014 prices. While we might expect falling oil prices to benefit consumers, the reality is that the potential price cuts could be limited.
Lawyers across the City are already being instructed to review every detail, every semicolon and every ‘notwithstanding’ of those contracts. One can imagine that any company seeking to unburden itself by recourse to litigation will inevitably meet stiff resistance.
Whilst not directly linked to the fall in oil prices, it’s worth noting that the European Commission is investigating whether oil companies have colluded in reporting distorted oil prices to the price reporting agency, manipulating the reported price of oil. If true, such behavior may amount to breaches of European Competition law prohibiting cartels, restrictive business practices and abuses of dominant market positions. Even small distortions could have a huge impact on prices and, ultimately, harm consumers.
So will the plummeting oil prices keep the lawyers busy? The answer, almost certainly, is probably!