Tethys Petroleum Limited v The Rt Hon The Lord Lilley & Anor

The claim was a first instance application to strike out or obtain reverse summary judgment against a negligence claim by Tethys Petroleum Limited against two former directors arising from a 2012 tripartite financing arrangement entered into by the claimant's Kazakh subsidiary (TAG) and an abandoned separate Georgia investment claim. The principal legal issues were (i) whether Article 133(A) of the claimant's articles of association (a director indemnity governed by Cayman law following re-registration) barred the claim; (ii) whether the claimant was a party to the service agreement relied on to sue the second defendant in contract; (iii) whether amendment to plead wilful neglect/default could be permitted; (iv) whether the claimant had suffered loss (or whether loss was sustained by a subsidiary); and (v) the consequences of abandonment of the Georgia claim.

The court held that (i) both defendants had been appointed "on the footing" that the articles applied and Article 133(A) was a valid Cayman-law indemnity which extended to acts and omissions in a wide sense and applied to claims by the company itself; (ii) the carve-out in Article 133(A) required wilful act/neglect/default interpreted as conscious or suspected breach (following Cayman/Guernsey authority), and the claimant's pleaded case alleged only negligence and did not, in its present form, give rise to a real prospect of establishing wilful neglect/default; (iii) the claimant was not a contracting party to the service agreement produced and no pleaded basis for privity exceptions was advanced; and (iv) even if the indemnity point failed, the claimant had not suffered the pleaded loss because the subsidiary TAG, not the claimant, was the party exposed and the claimant’s payment was a voluntary commercial settlement. The court therefore struck out the claim (alternatively entered summary judgment for the defendants), refused the proposed amendments and dismissed the expert evidence application.

The claimant, a Cayman-registered oil and gas company and former Guernsey company, sued two former directors for negligence in respect of: (a) a 2012 tripartite loan arrangement involving its Kazakh subsidiary Tethys Aral Gas LLP (TAG), Eurasia Gas Group LLP (EGG) and RBK Bank JSC (RBK), and (b) a June 2013 decision to invest in Georgian exploration blocks (the Georgia claim, later abandoned). Damages of US$3.4 million were sought, reflecting sums paid in 2019 to settle enforcement of pledges given by TAG.

The defendants applied to strike out or obtain reverse summary judgment on five grounds: (1) Article 133(A) of the articles of association indemnified directors and former directors against liabilities arising from acts/omissions in the execution of office except for loss caused by their own wilful act, neglect or default; (2) the claimant was not a party to the service agreement relied on against the second defendant and so no contractual claim in employment could be sustained; (3) the contractual claim against the second defendant was an abuse of process because it was not pleaded in the claim form; (4) the claimant had not suffered the pleaded loss because the loss was that of its subsidiary TAG; and (5) the Georgia claim had been abandoned and should be struck out.

The court addressed the applicable civil procedure test for summary judgment/strike out (no real prospect of success; no other compelling reason for trial) and principles of contractual interpretation. It found that:

• The articles contained an express indemnity. After the company migrated to the Cayman Islands, Cayman law governed the validity of the indemnity and such broad director indemnities are permitted under Cayman law.
• Both defendants were appointed "on the footing" of the articles, so the indemnity was incorporated into their contractual position as directors.
• Article 133(A) was construed to cover acts and omissions "in or about the execution of their offices" and to apply to claims by the company as well as by third parties.
• The exception for "wilful act, neglect or default" required conscious or at least suspected awareness that the conduct might be a breach of duty (following the approach in Cayman/Guernsey authority); the claimant's pleaded case alleged only negligence and its proposed amendments did not, in their present form, properly plead the requisite conscious wrongdoing.
• The service agreement produced named a different employer (Tethys Services Limited) and the claimant was not a contracting party; no pleaded basis for an exception to privity was advanced, so the contractual claim against the second defendant failed.
• Independently, the pleaded loss was that of TAG and the claimant had voluntarily funded TAG's settlement; there was no pleaded legal obligation on the claimant to pay, so the claimant had no real prospect of recovering the alleged loss.

The court dismissed the expert application to rely on a linguist's report as unnecessary and refused the amendment application. The claim was struck out (alternatively summary judgment entered for the defendants). The Georgia claim was also ordered struck out as it was not being pursued, with costs consequences to be determined at a consequential hearing.

The court struck out the claimant's claim (alternatively entered summary judgment for the defendants). Rationale: Article 133(A) of the claimant's articles, valid under Cayman law and incorporated into the defendants' appointments, indemnified the defendants for acts and omissions in the execution of office unless there was wilful act/neglect/default; the claimant's pleaded case alleged only negligence and its proposed amendments did not show a real prospect of establishing the requisite wilful conduct. Separately, the claimant lacked a real prospect of loss because TAG, not the claimant, was the party exposed and the claimant's payment was a voluntary settlement. The service agreement produced did not create contractual privity between the claimant and the second defendant. The claimant's applications to amend and to adduce expert grammatical evidence were refused.