Last updated: October 3, 2013 8:18 am

BP wins spill compensation appeal

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A BP company logo sits on a flag as it flies on the forecourt of a gas station operated by BP Plc in London, UK©Bloomberg

BP has secured a first victory in its legal campaign to limit its compensation settlement for the 2010 Deepwater Horizon disaster, following a favourable ruling from a US court.

The Fifth Circuit appeals court in New Orleans on Wednesday night approved an injunction to stop payments to businesses that had not “experienced actual injury traceable to loss” from the Deepwater Horizon accident.

The ruling overturned earlier decisions by the district court that rejected BP’s calls for such an injunction.

In a majority opinion, the appeals court also ruled that if businesses that did not suffer losses as a result of the spill were compensated, the whole settlement could be invalid.

BP welcomed the decisions, which may improve its chances of preventing the cost of the settlement rising to more than double its original estimate of $7.8bn. The figure has already been increased to more than $9.6bn, but on recent trends in payments it was on course to be higher than $15bn.

Shares in BP, which are still trading below the level they were at before the Deepwater Horizon accident, rose 1.7 per cent in early London trading on Thursday to 439.7p.

Since last year, BP has been challenging Patrick Juneau, the court-appointed administrator of claims under the settlement, over his methodology for calculating compensation for businesses’ lost profits, which has allowed them to maximise their apparent losses by presenting records of cash inflows and outflows.

Although Judge Carl Barbier at the district court backed Mr Juneau’s view, the appeal court argued that his method was “completely disconnected from any reasonable understanding of calculation of damages”.

The appeal court did not clearly uphold BP’s argument that when calculating losses it was essential to “match” revenues with the costs incurred to generate those revenues, and rejected its case that companies with lumpy profits should be compelled to use less favourable comparisons of their earnings before and after the spill.

Nevertheless, two of the three appeals judges ruled that it was more important to save BP and its shareholders “hundreds of millions of dollars of unrecoverable awards” than it was to continue payments to “individuals who may be reaping windfall recoveries because of an inappropriate interpretation of the settlement agreement”.

In depth

BP trial

BP Plc Chief Executive Officer Robert Dudley

Latest news on the litigation in the US to resolve damages and apportion blame for the 2010 Deepwater Horizon disaster

The majority judges said in their ruling: “This case is one of the largest and most novel class actions in American history. Significant legal questions are involved that will affect the course of class action law in this country.”

*One of the two judges in the majority also had strong words on businesses that have not suffered losses as a result of the spill being able to claim compensation. That issue has caused controversy because of plaintiffs’ lawyers advertising for clients saying claimants did not need to prove their losses.

She said: “The district court had no authority to approve the settlement of a class that included members that had not sustained losses at all, or had sustained losses unrelated to the oil spill, as BP alleges.”

If those people were being paid compensation, the judge added, the entire settlement could be legally invalid.

BP said it was “extremely pleased” with the ruling, adding that it “affirms what BP has been saying since the beginning: claimants should not be paid for fictitious or wholly non-existent losses. We are gratified that the systematic payment of such claims by the claims administrator must now come to an end”.

Lawyers representing plaintiffs seeking compensation also welcomed the ruling, saying they were pleased that “the vast majority” of claimants would continue to be paid.

They added: “We look forward to working with the claims administrator and the court to determine the best way to get the affected claims processed and paid as soon as possible.”

*This story has been amended from a previous publication to correct the attribution of one judge’s statement.

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