Energy: onshore pipelines - nothing goes without saying

In the recent case of Perenco UK Limited Southern Gas Networks PLC v Mr William Henry Bond [2016] EWHC 1498 (TCC) the Technology and Construction Court refused to imply a term into a deed concerning compensation to the land owner for “sterilisation” so as to make the compensation provisions work in unison with another agreement that offered compensation for an adjacent pipeline on the same land. The decision of the Court illustrates the strict approach to implying terms into such agreements.

Background

Mr William Henry Bond is the owner of land adjacent to a clay mine.

On 1 June 1994 Mr Bond entered into a deed with British Gas plc (“BG”) that granted an easement to BG to run a subsurface pipeline across land owned by Mr Bond (the “BG Deed”). The relevant easement could have been acquired under schedule 3 to the Gas Act 1996, but the parties elected to agree a deed. Southern Gas Networks Plc (“SGN”) is the successor to BG.

On 23 September 1994, BP Exploration Operating Company Ltd. (“BP”) also entered into a lease (the “BP Lease”) with Mr Bond for the subsoil of a strip of land to run their pipeline. This pipeline ran roughly in parallel to the BG pipeline. The rights to run the pipeline could have been compulsorily acquired under the Pipelines Act 1962. Perenco UK Ltd. (“Perenco”) is successor in title to BP.

It was not in dispute that the effect of the presence of the pipelines was to “sterilise” the extraction of clay and other minerals from the land in question.

As is usual, the BG Deed and the BP Lease each provided for compensation to Mr Bond in circumstances where he was in a position to extract the clay or other minerals but was prevented from doing so due to the relevant pipeline.

In relation to the BG Deed, the effect of these provisions was that if Mr Bond wished to work any minerals, he had to give 30 days’ notice of his intention to do so to SGN. SGN could then give a counter-notice requiring Mr Bond to leave the minerals unworked. In that case, SGN would become liable to pay compensation to Mr Bond. If no such notice was given within the 30 day period, Mr Bond may work the minerals and will not be liable for damage caused so long as he does so “in the manner proper and necessary”. However, SGN may give a counter-notice “at any time” and after the expiry of the 30 day period, in which case works could not then be started or, if started, would then have to stop and compensation be paid.

The BP Lease incorporated a different clause which required Perenco to give a counter-notice within 3 months to pay compensation if it did not want to divert its pipeline.

The compensation terms were different between the BG Deed and BP Lease, as the BG Deed provided for compensation for minerals that could not be exploited whereas the BP Lease provided for compensation based on the diminution in value of the land. However, there was a provision in each agreement that prevented double compensation – which would have allowed Mr Bond to receive only the greater amount and BG and BP would each pay half of that amount.

Mr Bond gave the notice required to Perenco and SGN. Perenco, under the BP Lease, provided its counter-notice within the required 3 month period and paid Mr Bond £287,525 (plus interest) as compensation, being its assessment of the diminution in value due to the presence of its pipeline.

SGN’s position was that it is was not obliged to, and therefore did not, serve a counter-notice as it could serve a counter-notice “any time”. As the service of the counter-notice was the trigger provision for the payment of compensation SGN argued that it therefore followed that it did not come under any obligation to pay compensation.

Mr Bond disagreed and stated he was entitled to compensation under both the BG Deed and BP Lease. His view was that if SGN were entitled not to pay compensation merely by not serving a counter-notice, the BG Deed needed an implied term in order for it to make commercial sense. His argument was put as follows:

“The Claimant contended that a term should be implied into the BG Deed to the effect that in circumstances in which a notice has been served …and the proposed mineral workings will cause damage to both the gas pipeline under the BG Deed and the oil pipeline under the BP Lease, and an election has been made under paragraph 2(2)(b)(ii) of the BP Lease to pay compensation, then the grantee under the BG Deed shall be deemed to have also served a counter-notice in order to engage the compensation provisions of the “mining code”….. The Claimants also contend that the implied term would deem a counter-notice to have been served (as opposed to require), as this would represent a more commercial approach and avoid the need to require specific performance.”

Whilst contending that no compensation was payable, SGN in their skeleton argument, estimated compensation of £2,382,817 which was therefore significantly higher than Perenco had paid.

Arbitration

As required by the agreements, the dispute as to the level of compensation and the timing of any notice from SGN was referred to arbitration which found in favour of Mr Bond. This was on a contention that there was an implied term requiring SGN to serve a counter-notice to trigger the payment of compensation.

Perenco and SGN then appealed.

Decision

On appeal, the Technology and Construction Court referred to Marks and Spencer v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015] UKSC 72 [see our Law Now] and reiterated Lord Neuberger’s statement of principle which he derived from Lord Simon’s speech in BP Refinery (Westenport) Pty Ltd. v Shire of Hastings (1977) 180 CLR 266. These state that for a term to be implied, the following conditions (which may overlap) must be satisfied:

(1) it must be reasonable and equitable;
(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
(3) it must be so obvious that it goes without saying;
(4) it must be capable of clear expression; and
(5) it must not contradict any express term of the contract.

Taking into consideration Marks and Spencer v BNP Paribas and the facts in dispute, the Court decided that there was no implied term. The Court considered that if BP and BG had contemplated the particular scenario in the putative implied term put to them by Mr Bond, they might have agreed some other provisions to cater for it. However it was not at all clear either that they intended something other than what was expressly agreed and which would have put them in a worse position than reliance on their statutory rights.

The Court was of the opinion that it would have been very simple for the parties to have agreed express wording to deal with the situation now contended for by Mr Bond and the fact that they did not do so was very telling. This was especially so where it was clear that the statutory provisions had been considered, and amended, and where the document itself “worked” without the need of any further implied terms.

Comment

The decision of the Court illustrates that following Marks and Spencer v BNP Paribas the Courts are applying a strict approach to implying terms into agreements. As a consequence, absent statutory intervention, it will be difficult to imply a term into an agreement that was subject to extensive negotiation between legally advised parties.

In the context of adjacent pipelines that are the subject of separate agreements concerning access/easements and compensation, this case highlights the need to carefully consider how the two might work together, or against each other, and then to ensure they are expressly dealt with in any agreement. This is especially so where we see the use of land intensifying (and diversifying) with landowners granting multiple rights that need to co-exist.

The law will likely anticipate that the parties will have considered the relevant issues and dealt with them in the agreements. Absent express words, the Courts will be slow to depart from the implication of the natural words of the agreements themselves.