Deutsche Bank Ag v Total Global Steel Ltd

A contractual requirement that emissions credits may be used under the EU emissions trading scheme concerns practical usability as well as legal eligibility. A registry check which prevents surrendered credits from being used therefore means that they do not satisfy the term. Under the scheme, a credit surrendered in exchange for an allowance cannot be reused. Damages for non-compliant delivery are ordinarily assessed at breach, but a later date may be appropriate where justice and mitigation require it. Where there is no available market, the court must make the best valuation possible from the evidence.

Deutsche Bank bought 492,000 certified emissions reductions from Total Global Steel under four spot contracts. The credits had previously been surrendered under the EU emissions trading scheme. Deutsche Bank claimed that the contracts required delivery of credits capable of being used for compliance under that scheme, and claimed damages for breach.

The issues concerned contractual construction, the legal and practical effect of the European Commission’s registry controls, mitigation, the date for assessing damages, and the value of surrendered credits. The claim was tried at first instance in the Commercial Court.

1. Contractual term. The incorporated definition of an “EU Credit” meant that the CERs had to be capable of use for determining compliance with emissions commitments pursuant to and in accordance with the EU scheme. The term applied notwithstanding that the Allowance Annex was principally directed to futures and options and the transactions were spot trades.
2. Meaning of “may be used”. The phrase required more than legal eligibility under the Directive and Regulation. It required that the credits could in practice be used by operators. The CITL was an inherent part of the scheme, and the effective check preventing the re-surrender of surrendered CERs prevented such practical use.
3. Legal position on reuse. Article 11a of the Directive, construed purposively, permitted an operator to exchange a CER under the scheme once, but did not permit a surrendered CER to be reused. The October 2010 amendment to the Regulation supported that interpretation. The court nevertheless held, as an alternative, that if reuse had otherwise been lawful, the Central Administrator would not have been entitled to impose the check because the Directive and Regulation did not authorise it.
4. Breach. The surrendered CERs could not be used for compliance and therefore did not comply with the contracts. TGS was liable for breach of all four contracts.
5. Mitigation and assessment date. The ordinary damages measure was the difference between the value of the delivered credits and compliant credits. The assessment date was 22 March 2010, after the expiry of Deutsche Bank’s reasonable opportunity for TGS to remedy the breach. The mitigation complaint failed: Deutsche Bank acted reasonably in retaining and quarantining the credits, and the ordinary market-difference measure already accommodated the suggested later sale.
6. Value and result. The surrendered CERs were not valueless. Their value was assessed at €3.25 each, below the value of AAUs. Damages were therefore €8.50 per credit, totalling €4,182,000. The claim succeeded. Costs were left for further submissions.