ClientEarth ordered to pay Shell’s costs in the latest development in their climate derivative action

On 31 August 2023, the High Court of England and Wales dismissed ClientEarth’s application for permission to appeal the May 2023 and July 2023 rulings which held that ClientEarth’s case against Shell plc’s (Shell) board of directors should not continue. In the same judgment, the Court also ruled that ClientEarth should pay Shell’s costs in relation to the claim. This displaced the typical costs rules that apply to the initial stage of a derivative action, which usually prevent a successful defendant (like Shell in this case) from recovering its costs where it has volunteered a submission and/or attendance at a hearing without invitation from the court.

Background to ClientEarth’s climate claim against Shell’s directors

Almost a year after first announcing its intention to bring a derivative action against Shell’s directors, in February 2023 ClientEarth (a minority shareholder in Shell) made an application for permission to bring a ‘derivative action’ (i.e., an action on behalf of the company) against Shell’s directors, alleging that their failure to adopt and implement an appropriate climate risk strategy for Shell was a breach of their duties to the company.

In May 2023, the High Court dismissed ClientEarth’s written application, noting (amongst other things) that the Court is not well-equipped to interfere with directors’ management decisions and that a person acting to promote Shell’s success would not seek to continue the claim (for more detail on the judge’s reasoning, see our previous blog post here). ClientEarth responded by exercising its right to ask the Court to reconsider that decision at an oral hearing. This hearing took place on 12 July 2023 and both ClientEarth and Shell made representations. The judge issued a new judgment on 24 July 2023, which upheld his initial decision.

In this latest judgment (issued on 31 August 2023), the Court set out further summary reasons for its refusal. More interestingly, the Court also made significant costs orders against ClientEarth, recognising that the case was far from “the norm” and explaining why this justified a departure from the costs rules that would usually apply in these circumstances.

The judgment on costs

An unsuccessful party to litigation will usually be ordered to pay the costs of the successful party. However, this general rule is subject to permitted derogations, including in circumstances where a defendant company volunteers a submission for and/or attends a hearing at the initial stage of a derivative action without an invitation from the Court. In such cases, the defendant company, even if successful, will not normally be allowed to recover the costs of that submission and/or attendance.

In this case, Shell volunteered written submissions at the initial stage of the proceedings, then attended the July 2023 hearing without an explicit invitation. Nevertheless, Shell argued that the general costs rule should apply and that ClientEarth should pay all of Shell’s costs at this stage, not least because ClientEarth’s allegations against Shell’s directors were “unfounded” and “very serious”; ClientEarth’s application had not been made in good faith; and because ClientEarth had chosen to commence proceedings without engaging substantively with any of the arguments raised by Shell in response to ClientEarth’s letter before claim. ClientEarth refuted Shell’s arguments that its application was not made in good faith and submitted that the derogation from the general rule applied and that Shell was not entitled to the costs of its written and oral submissions, nor the costs of its attendance at the oral hearing.

The judge made a number of comments when explaining his decision in relation to costs:

• The judge disagreed with ClientEarth’s assertion that the purpose of the derogation from the general rule is to signal to minority shareholders that there is limited cost risk associated with the prima facie stage of a derivative action. The judge instead characterised the derogation as a “filter for the protection of the company” and said that its purpose is to reflect the fact that companies’ participation at this stage of proceedings is not expected unless there is something which “takes the case out of the norm”.
• The judge helpfully set out a number of factors which would be of significance in determining whether a case is “out of the norm”, and stated that various circumstances applied which would indicate that this case was one such instance:

• the case was always likely to attract substantial public interest and ClientEarth understood this. Therefore, it was reasonable for Shell to surmise that even a finding of a prima facie case against it could have had a particularly negative effect on its business;
• ClientEarth made serious claims against all of Shell’s directors “without distinction” and sought declaratory and injunctive relief “designed to interfere” with a future business strategy, rather than seeking damages or compensation for a clear past breach causing measurable loss;
• ClientEarth holds very few shares in the company and had little support for its chosen course of action among other shareholders; and
• the number of defendants, nature of the allegations and possible adverse effect on Shell’s business meant that the parties should always have anticipated especially costly proceedings if permission to continue were granted. This meant that Shell’s written submissions and attendance at the hearing were both proportionate and appropriate, and ought to have been expected and accounted for by ClientEarth.

• The judge also noted that, even if Shell had not volunteered its participation at the prima facie stage, the Court would likely have explicitly invited it to do so due to the nature of the application. ClientEarth should have anticipated this and applied for costs management even in the absence of an explicit invitation to Shell from the Court. This was especially true given that the derogation from the general rule is only the normal, not the invariable, approach.

Final remarks

• ClientEarth will now have to appeal directly to the Court of Appeal if it wishes to continue its claim (its CEO, Laura Clarke OBE, has indicated that it intends to do so).
• The decision emphasises that the derogation from the general rule as to costs applies only normally and not invariably. It provides clear guidance for future cases of this nature on the circumstances which might “take a case out of the norm”, so that the derogation from the general rule is not applied at the prima facie stage.