Energy and utility companies will be interested in the outcome of the recent Court of Appeal decision in the case of Bocardo SA v Star Energy UK Onshore Limited [2009] EWCA Civ 579. The case considers the law of trespass as it applies to ground lying beneath the surface of an owner's land and while in this case the trespass related to oil pipelines, the principles will be of relevance to other instances of substrata trespass. This decision could have significant impact for energy and utilities companies, as well as landowners.
Drilling of pipelines constituted trespass
It is well established that a landowner owns the substrata beneath his property, in theory down to the centre of the earth. Star had acquired a licence from the Crown to extract oil from an oilfield which in fact lay underneath land owned by Bocardo. Star constructed a well head on adjacent land and drilled three pipelines from the well head, at an angle running through the substrata of Bocardo's land, at a depth of between 800 and 2,800 feet, to the oilfield. These were to be used for the extraction of the oil from the oilfield.
It was clear that the pipes did not interfere in any way with Bocardo's use and enjoyment of its land at surface level. Bocardo argued that the construction of these pipes amounted to trespass, as no agreement was obtained to the laying of the pipes, and Star had not applied for any ancillary rights under the Petroleum (Production) Act 1934 to do so. Originally, the High Court upheld this view. Damages were assessed on the basis of the figure that the parties would have agreed, had they negotiated a payment for the use of the rights. This figure was valued at 9% of the income received from the extraction of the oil, from the time the trespass first occurred until the oilfield was exhausted, which at the time of the case amounted to over £600,000.
Technical trespass which reduced the measure of damages
Clearly, the decision at first instance posed a potentially serious problem for utilities companies who may have found themselves exposed to liabilities in respect of infrastructure previously constructed without the necessary rights from landowners having been obtained and may therefore have been dissuaded from pursuing new infrastructure projects in the future.
Star appealed to the Court of Appeal which agreed that a trespass had been committed. Whilst Star undoubtedly owned the right to extract the oil, it had neither a common law nor a statutory right to run the pipelines through the land and it had not reached agreement with Bocardo to do so.
However, the Court of Appeal described the trespass as "purely technical" as it did not interfere with Bocardo's use or enjoyment of the land in any way. As Bocardo did not even own the oil beneath the land (which belonged to the Crown and Star as its licensee), it had not lost any rights through the construction and use of the pipelines.
In deciding how much compensation to award, the Court looked at two factors: first, the amount of money to which Bocardo would have been entitled, under the statutory compensation framework, had Star sought to acquire the right to lay the pipes by invoking some statutory regime. This was valued at £82.50. Secondly, the Court considered what would have happened in the event of a negotiation between the parties. In contrast to the High Court decision, this assessment was made against the background of the statutory compensation regime. It was considered that Star would have been inclined to be generous to avoid incurring great legal expense in protracted negotiations and on this basis, the sum awarded was £1,000. One of the crucial factors in determining the case was that there was no 'special' value to the land as a result of the ability to extract the oil from it, as Bocardo did not own the oilfield itself.
The Court distinguished cases where the owner of the land granted the license to extract oil beneath the land, but failed to grant ancillary access rights at the time of granting the license to extract. It was held that in such situations, the landowner would be stopped from preventing access. However, in this case, Bocardo had not been involved in the licensing of the oilfield.
What are the consequences for energy and utility companies, and landowners?
If this decision is followed, where a "technical" trespass of the substrata has occurred which has not affected the owner's use of the property or indeed its value, any damages awarded will be nominal.
That said, the fact that the Court of Appeal has upheld a claim for trespass in these circumstances does mean that energy companies must seek to acquire the necessary rights from landowners either by agreement or by invoking some statutory regime to acquire them compulsorily. At the development stage of projects, energy companies ought now to be able to assess more accurately the cost of obtaining the required rights. It is undoubtedly helpful to know that costly legal challenges to a fair offer are unlikely to succeed. Whilst the initial decision by the High Court could potentially have opened the floodgates to backdated high-value trespass claims, the Court of Appeal decision has effectively closed off this avenue. The likelihood of such claims now being brought where there has been a technical trespass that has little effect on the landowner's right to the use and enjoyment of his land should therefore be much reduced.
Click here to read the judgement in Bocardo SA v Star Energy UK Onshore Limited.