A recent case in the Commercial Court serves to highlight the dangers of complex litigation claims, particularly in cases involving allegations of fraud.

Background

In the case of Leni Gas and Oil Investments Ltd & Anr. -v- Malta Oil Pty Ltd & Anr [2014], Mr Justice Males examined the legal principles applicable to the tort of deceit. The circumstances surrounding this case can be summarised as follows: the defendants were subsidiaries of Mediterranean Oil & Gas Plc. (MOG). MOG originally held a full interest in a Malta off-shore exploration licence by virtue of a ‘Production Sharing Agreement’ (PSA) with the Maltese Government, covering any exploration and production activities in a particular section of water 150km off of the Maltese Coast. MOG subsequently assigned a 10% interest under the PSA to LGO, with a separate ‘Joint Operating Agreement’ regulating the rights and obligations as between MOG and LGO under the PSA.

As the parties’ commitments under the PSA drew close to a time when further expenditure on seismic surveys and drilling was due, LGO had taken a view that it wished to sell its 10% interest and avoid being committed to further expenditure on this particular project.  LGO had previously sought to assign its 10% interest to MOG in return for release from its outstanding liabilities. In the event, LGO divested its 10% interest to MOG for a nominal amount of US$1, in return for MOG releasing LGO from existing liabilities of US$135,000.

At the same time as negotiations with LGO were taking place over LGO’s sale of its 10% interest under the PSA, MOG were in discussions with another company, with a view to farming out a proportion of its interest under the PSA to a company with the resources available to finance the drilling of exploration wells. So as not to alert LGO to the prospect of any farming out agreement being close to finalisation (which would risk LGO increasing the value of its 10% interest), MOG’s chief executive officer carefully negotiated terms with LGO, so as not to raise any suspicion as to how advanced MOG were in talks with another company over a farming out agreement. In the event, the farming out agreement was completed and announced three weeks after LGO’s assignment to MOG of its 10% interest.

LGO claimed it had been induced to sell ‘quickly’ and ‘cheaply’ by a comment made by MOG during a telephone conversation and without knowing that MOG were in confidential talks with a company who were interested in acquiring part of MOG's interest in the licence, in exchange for the financing of exploration wells. LGO valued its claim at anywhere between US$6.5 million and US$10 million, although quantum played no part in the trial (which was directed at issues of liability).

The case itself hinged on a telephone conversation which took place between the parties’ respective chief executive officers and it was this telephone conversation in which LGO claimed that the deceit took place.

Claim in deceit

Briefly, the law surrounding a claim in deceit requires a claimant to identify: (1) a representation, which is (2) false, (3) dishonestly made, and (4) intended to be relied on and in fact relied on.  Such elements carry with it a high threshold for any claimant to meet in order to establish its claim.

Having identified a particular telephone conversation in which LGO contended that the deceit had taken place, LGO were effectively seeking to establish a representation based on a true statement, made orally and with the intention of misleading LGO as to the true state of affairs in relation to MOG’s negotiations for a farming out agreement.    

Overall, having heard from three witnesses over an eight day trial, Mr Justice Males held in favour of MOG, in that there was no intention in the particular telephone conversation in question to mislead the claimant into a sale of their interests at a substantially lower value; and that no reasonable objective person could have understood it that way. Furthermore, LGO could not have honestly understood that a representation was being made. Even if the alleged misrepresentation had been made and LGO had understood it to be made, MOG had satisfied the burden of proving that the claimants would have sold their interest in any event.  

The judge held that the MOG had not intended to deceive LGO - rather the chief executive officer of MOG had been a skilful negotiator who had justifiably withheld confidential information which he had no duty to disclose.

Conversely, Mr Justice Males was highly critical of LGO’s witness evidence, finding that the accounts of the telephone conversation were contrary to the telephone notes, being highly inconsistent and conflicting with the obvious meaning.  In short, it was found that LGO’s witness evidence was based largely on hindsight and not supported by the contemporary evidence.

Commentary

This case provides an interesting overview of how agreements for the exploration and production of oil operate in the industry. As well as providing a clear and succinct commentary on the law of the tort of deceit, this case also illustrates the difficulties in advancing a claim based on fraudulent misrepresentation, particularly when reliant on oral evidence. The case effectively hinged on the parties’ respective witnesses, with Mr Justice Males clearly preferring the evidence of MOG’s witness. The comments in the judgment relating to the witnesses should offer clear guidance as to the dangers of litigation which largely depend upon the performance of your witness. 

Furthermore, the court’s acceptance of (a) MOG’s careful negotiations in order to successfully conclude a farming out agreement and (b) recognition that MOG did not owe any duty of disclosure to LGO in relation to such confidential information, is a recognition of the emphasis placed by the court in general arms-length commercial dealings and negotiations, affirming long standing principles established by the Commercial Court.

By way of a postscript to the procedural history of this case, a further ruling on costs serves as an illustration as to the potential dangers in a party’s conduct during litigation. On an application by MOG, Mr Justice Males ruled that LGO should pay indemnity costs (a basis of awarding costs as a penalty for misconduct or as a result of a successful Part 36 offer having been made, which is assessed without reference to proportionality) to MOG.  This has been estimated to be in the region of £1.5 million. Amongst the justification for such a ruling, LGO were criticised for aggressively advancing a claim in fraud that was lacking in evidence, as well as LGO’s public statements issued in relation to the claim.