Oil and gas: genuine negotiations vs deceitful statements

The High Court was recently asked to consider whether a representation concerning an oil and gas exploration block amounted to the tort of deceit. The case reminds us of the elements of the tort of deceit and that it can be difficult to establish. It also provides some comfort to those making statements during the course of transactions, as it clearly identifies that genuine negotiations (which may include withholding good news) and hard bargains, do not, of themselves, give reason to doubt an individual’s honesty and give rise to allegations of deceit.

Facts

The defendants (subsidiaries of Mediterranean Oil & Gas Plc) had a Production Sharing Contract (PSC) with the Government of Malta relating to Area 4, approximately 150 km offshore Malta, a ‘frontier’ exploration region. Leni Gas and Oil Plc and its subsidiary, Leni Gas & Oil Investments Ltd (together the claimants) held a 10% interest in the same area.

During a telephone conversation on 10 July 2012, the defendants’ CEO told the claimants that a farm-out would be vital and that the defendants were opening a data room the following week. Following this conversation, on July 31, the claimants sold its 10% stake to the defendants for a nominal US$1 plus US$19,050 in past liabilities.

Less than a month later, the defendants signed a US$70m deal to sell a 75% interest in the same block to Genel Energy. Following the Genel deal, it is thought that the claimants’ former stake could be worth around US$9m.

The claimants’ case was that the statements made on 10 July 2012 were deliberately intended to create a false impression as to the true state of affairs. They claimed this induced them to sell their interest for substantially less than its true value and that the defendants’ actions gave rise to a liability in deceit.

Issues

The claimants claimed that the defendants fraudulently induced them to sell their 10% interest for substantially less than its true value when they would not otherwise have done so. They claimed the defendants’ CEO fraudulently represented that the process for the ‘farming-out’ of part of the defendants’ 90% interest in the block “had not yet begun in earnest” and that the defendants were “not yet in negotiations or discussions (alternatively serious negotiations or discussions) with any potential farmee”.

The truth of the CEO’s actual statements, that a farm-out would be vital and the defendants were opening a data room in London the following week, was not disputed. However the claimants said fraudulent representations were implicit in the CEO’s statement and that these were deliberately intended to create a false impression as to the true state of affairs. This, they claimed, amounted to deceit.

The elements of a tort of deceit are as follows: (i) a representation, which is (ii) false, (iii) dishonestly made, and (iv) intended to be relied upon and in fact relied on.

The principal issues were threefold, whether: (i) the defendant’s CEO intended to make the representation alleged; (ii) the claimants’ CEO had understood that such a representation was being made; and (iii) that representation caused the claimants to agree to sell their interest to the defendants.

Decision

The High Court found in favour of the defendants: that no representation or implied representation was made. Further, the claimants did not understand such a representation had been made and that, even if they had, the representation had not caused the claimants to sell their interest.

The court considered that the defendants’ CEO was a “skilled and successful negotiator”, but did not find this to be a reason to doubt his honesty. The court distinguished between the defendants’ “suppression of good news” (which, the court found, should rightly have been regarded as highly confidential and over which there was no duty to disclose) and the claimants’ unsupported conclusion that what was said about the data room was intended to deceive.

In contrast, the judge criticised the consistency of the claimants’ witness evidence, finding their accounts of the critical conversation unconvincing and contrary to the plain meaning of contemporary notes.

Comment

This case demonstrates that the court acknowledges the power of negotiators to drive a hard bargain. As always, it is important not to be deceitful in negotiations; half-truths may amount to deceit. However, there is no general duty of disclosure particularly where the information is confidential.

As Mr Justice Males noted, “it may have seemed to [the claimants] that the prospectivity for these proceedings and the amount at stake were such that the economics of this litigation were positive. However, litigation like the oil business is a high risk activity and [the claimants have] failed to strike oil”. The court further demonstrated its displeasure with the claimants’ conduct of the case by awarding costs on an indemnity basis (meaning that the receiving party (in this case the defendants) will obtain a higher legal cost recovery).

A transcript of the hearing can be found here.

Leni Gas & Oil Investments Ltd & Anor v Malta Oil Pty Limited & Anor [2014]

Co-Author:
Jenny Unwin
+44 207 367 3763
Jenny.Unwin@cms-cmck.com