Supreme Court hands down Star Energy v Bocardo SA judgement

Supreme Court hands down Star Energy v Bocardo SA judgment
 

3 August 2010

Supreme Court hands down Star Energy v Bocardo SA judgment
 
On 28 July 2010, the Supreme Court handed down the eagerly awaited judgment of the Star Energy Weald Basin Limited ("Star") v Bocardo SA ("Bocardo") appeal. 1 As you will note from our previous articles in this regard, 2 this case raises important issues relating to the level of damages, arising as a result of trespass, in relation to the onshore extraction of petroleum in England. Since Scotland has its own separate system of property law, any issue in relation to Scottish land would need to be considered under Scots law principles.
 
Reminder of key facts
 
Bocardo was the owner of an estate in Oxted, Surrey. Star had a licence, under the Petroleum (Production) Act 1934 (the "1934 Act") (now repealed and replaced by section 3 of the Petroleum Act 1998, Schedule 3, para 4 of which preserves pre-existing licences), to search, bore for and extract petroleum from an oilfield beneath Bocardo's land. The most efficient means of recovering the petroleum from the oilfield was to sink a well as close to the apex of the oilfield as possible. Star's predecessor (Conoco (UK) Ltd) sunk three wells from the well head, by what is known as deviated or directional drilling, under Bocardo's land.
 
Before drilling the wells, Star's predecessor did not negotiate either a contractual licence or wayleave from Bocardo nor make a statutory application to the court under the Mines (Working Facilities And Support) Act 1966 (the "1966 Act") for the ancillary rights of access required to drill and lay pipes under Bocardo's land. Star in turn did not seek to do this when they acquired the licence from their predecessor. Up until July 2006, Bocardo was unaware that petroleum and petroleum gas were being extracted from beneath its land. On 21 July 2006 Bocardo commenced proceedings against Star for trespass. The case raised two distinct issues. First, whether drilling three wells, under Bocardo's land, was an actionable trespass. Secondly, the key issue of the case, if there was an actionable trespass, what was the correct measure of damages payable to Bocardo.
 
In relation to the issue of trespass, both the High Court (Peter J Smith) 3 and the Court of Appeal (Jacob, Aikens and Sullivan LJJ) 4 held that Star had trespassed on Bocardo's land. Both courts also agreed that such trespass did not affect or interfere with Bocardo's use or enjoyment of the land. Bocardo had suffered no real loss by the actions of Star. The only loss Bocardo could be said to have sustained was the missed opportunity to negotiate a suitable wayleave payment for the laying and use of the underground pipes.
 
In terms of damages, again, Star (and its predecessor) had the option either to negotiate a contractual licence or wayleave with Bocardo or make a statutory application to the court under the 1966 Act for ancillary rights of access to Bocardo's land. In terms of making a statutory application, the two relevant governing statutory provisions concerning the level of compensation payable are:
 

  1. Section 8(2) of the 1966 Act which provides "that the compensation or consideration in respect of any right…shall be assessed by the court on the basis of what would be fair and reasonable between a willing grantor and a willing grantee…"; and
  2. Section 3(2) (b) of the 1934 Act which provides "in determining the amount of any compensation to be paid in respect of the grant of any right, an additional allowance of not less than 10% shall be made on account of the acquisition of the right being compulsory".

 
Bocardo argued that this was a classic ‘key’ case. The second party ie Bocardo does not own the treasure but he does own the key to the treasure chest. The key has little or no intrinsic value. Its value is what it gives access to. What the owner of the key has is purely a bargaining position. It was an acceptance of essentially this argument that led a short-lived victory for Bocardo when Peter Smith J at first instance assessed Bocardo’s damages at £621,180 (being 9% of the gross revenue from the oil extracted during the relevant period up to trial) plus interest (together with 9% of all future revenue derived from the pipelines resulting in a potential windfall to Bocardo in excess of £6 million).
 
By contrast the Court of Appeal, focusing on the terms of the statutory provisions noted above, held that ordinary compulsory purchase principles apply to the assessment of compensation under section 8(2) of the 1966 Act and that pursuant to these Bocardo had no key value to exploit, were suffering no loss whatever, and would be amply compensated by an award of £1,000 (to include the 10% uplift provided for under section 3(2)(b) of the 1934 Act) in respect of both past and continuing trespass.
 
Following the Court of Appeal's decision, Bocardo appealed to the Supreme Court requesting that the High Court's assessment of damages be reinstated. Star cross-appealed on the question of whether there had been a trespass in the first place.
 
Outcome of the appeal
 
The appeal, which was heard over three days between 22 and 24 June 2010, saw the Lord Justices (Hope (Deputy President), Walker, Brown, Collins and Clarke) unanimously dismiss Star's cross-appeal on the trespass issue and by majority (Walker, Brown and Collins) dismissed Bocardo's appeal on the damages issue. A brief summary of the judgments of the Court, on the two distinct issues, is set out below.
 
(1) Trespass
 
Lord Hope handed down the judgment of the Court on the issue of trespass. In agreement with the Court of Appeal, Lord Hope dismissed the cross-appeal holding that Star had trespassed on Bocardo's land and that, subject to their submissions as to the amount of damages, they had no defence to Bocardo's claim.
 
(2) Damages
 
Ultimately dismissing the appeal, Lord Brown handed down the judgment of the majority of the Court on the issue of damages concluding that the Court of Appeal's approach (i.e. the award of £1,000) was to be preferred (following as it does Peter Gibson J's decision in the very similar circumstances in BP Petroleum Developments v Ryder). 5
 
Lord Brown held that the issue of damages centred around what the Court would have assessed as proper compensation to be paid by Star, to secure their right to install deviated wells or pipelines beneath Bocardo's land, had Star sought to enforce that right pursuant to the 1966 Act. In other words, what sum would the Court have assessed as proper compensation to be paid to Bocardo for having no option but to allow Star to install their pipelines under Bocardo's land?
 
Lord Brown further held that the answer to the above question was dependent on two other fundamental questions:
 

  1. Do the principles ordinarily governing the approach to valuation in the field of compulsory purchase apply equally to the construction and application of section 8(2) of the 1966 Act with regard to the compulsory acquisition of ancillary rights over (or, as here, under) land?
  2. Even assuming (contrary to Bocardo's argument) that compulsory purchase principles do apply in this context, do they operate to deny Bocardo what would otherwise be regarded as the powerful bargaining position of a landowner able to control access to a valuable oil field partially sited beneath their land?

 
In relation to the first question, Lord Brown held that the application of compulsory purchase principles could not be more clearly demonstrated than by the express requirement under section 3(2)(b) of the 1934 Act for a 10% or greater uplift in compensation “on account of the acquisition of the right being compulsory”.6 Lord Brown further contended that if the Court is to construe section 8(2) of the 1966 Act consistently with other legislative provisions governing compulsory acquisition, it falls to be approached on the basis that what is fair and reasonable depends not on what the grantee is gaining but rather on what the grantor is losing. 7 Lord Brown ultimately concluded that compensation was to be paid on the usual basis in compulsory acquisition cases (with, of course, a 10% uplift in terms of the provisions of the 1934 Act). 8
 
As to the second question, Bocardo submitted that their control over the necessary right of passage of wells through their land was in principle indistinguishable from the ownership of a ransom strip of land giving access to other land: in the latter case, without acquisition of the ransom strip, the second plot is landlocked; here, without acquisition of the required ancillary right of passage, the petroleum is earth-locked.9 Lord Brown acknowledged the closeness of the parallels between the two situations but pointed out that this by no means answered the question. Referring to the decision of the House of Lords in Waters v Welsh Development Agency 10 Lord Brown ultimately rejected Bocardo's contention that its power of control over the passage of wells or pipes through their land gave a pre-existing key value to the ancillary rights which Star needed to acquire from them. He also went on to reject Bocardo's contention that for purely geographical reasons the land through which access was required always had potential value so long as petroleum resources lay underground.11
 
As noted above, in ultimately dismissing the appeal Lord Brown held that the Court of Appeal's approach on the issue of damages (i.e. the award of £1,000) was to be strongly preferred.
 
Conclusion
 
Although oil and gas (and indeed coal bed methane) companies may be disappointed that the Supreme Court also found that there was a trespass, they will no doubt welcome the Court's conclusion on the issue of damages. There may be some critics however who believe that this could ultimately encourage these companies to commit the tort of trespass given the risk of being caught and having nominal damages awarded against them could prove more attractive than incurring the costs of obtaining easements and wayleaves from the landowner. In that respect, perhaps the true impact of this case has yet to be seen. In any event, this case should serve as a stark warning to all onshore extraction companies to ensure that they have all necessary consents in place prior to commencing any form of onshore drilling programme otherwise they could have a lengthy, not to mention costly, court case on their hands.
 

For further information please contact either Hazel Vallance or Neil Rainey.

  1. Star Energy Weald Basin Limited and another v Bocardo SA [2010] UKSC 35 (http://www.supremecourt.gov.uk/docs/UKSC_2009_0032_Judgmentv2.pdf)
  2. See http://www.shepwedd.co.uk/knowledge/article/1019-2521/bocardo-sa-v-star-energy-uk-onshore-limited-2009-ewca-civ-579/ and http://www.shepwedd.co.uk/knowledge/article/1018-2519/underground-trespass-the-impact-for-landowners-and-energy-companies/archive/)
  3. Bocardo SA v Star Energy UK Onshore Ltd and another [2008] EWHC 1756 (Ch); [2009] 1ALL ER 517
  4. Bocardo SA v Star Energy UK Onshore Ltd and another [2009] EWCA Civ 579; [2009] WLR (D) 187
  5. BP Petroleum Development v Ryder [1987] 2 EGLR 233
  6. See paragraph 71 [2010] UKSC 35
  7. See paragraph 74 ibid
  8. See paragraph 91 ibid
  9. See paragraph 78 ibid
  10. Waters v Welsh Development Agency [2004] 1 WLR 1304
  11. See paragraph 92 [2010] UKSC 35