House of Lords rules gas industry is not liable for contamination caused by its statutory predecessors [ 08 Nov 2007]

(Construction and Engineering )

In May 2006, we reported on the High Court ruling in R (on the application of National Grid Gas plc) v Environment Agency (17 May 2006) which found that National Grid Gas ("NGG") was liable under the Contaminated Land Regime (the "Regime") for contamination caused by its statutory predecessors.

Leave to appeal to the House of Lords was granted and on 27 June 2007, the House of Lords overturned the High Court’s decision and quashed the Environment Agency’s decision.

The facts of the case

A resident of a housing estate in Bawtry, Yorkshire discovered a pit filled with coal tar in his back garden in 2001. The housing estate had been built on a former gasworks during the 1960s.

Under Section 78A(2) of the Environmental Act 1990 ("EPA1990") land is contaminated if there is a significant risk of:

(a) significant harm being caused to the health of living organisms or other interference with ecological systems and, in the case of man, harm to his property; or

(b) where the pollution of controlled waters is being, or is likely to be, caused.

In 2003, the relevant local authority ("LA") identified the land as contaminated.  The LA found that the residents of the housing estate were at risk of harm being caused by the coal tar found and because there was a major aquifer underneath the site used for water abstraction, the contamination was thought to be causing, or was likely to cause, groundwater pollution. Where land contamination causes or may cause water pollution, the LA is required to designate the site as "special". As a result, the Environment Agency ("EA") becomes the relevant enforcing authority in place of the LA.

The EA was under a duty to serve a "remediation notice" on the "appropriate persons" requiring them to remediate the contamination. Such persons are, in the first instance, those who caused or knowingly permitted the contamination (a "knowing permitter") or, where such persons cannot be found, the owners or occupiers of the land, notwithstanding the fact such owners or occupiers may not be aware of the contamination.

Where, though, the relevant enforcing authority has the power to carry out the necessary remediation itself under Section 78N of the EPA 1990 (this Section provides such power in cases where the LA or EA would only be able to recover a portion of the costs of remediation from the relevant appropriate persons) it is precluded from serving a remediation notice.

Statutory guidance provides that where there is more than one knowing permitter and one of those persons cannot be found (for example, where a company has since been dissolved, as was the case here), the enforcing authority should recover from the remaining knowing permitter only the portion of the cost which that person would have been liable for if the other knowing permitter could have been found.

In the NGG case, contaminating substances were likely to have been generated on the site by the production of coal gas by NGG's predecessors, Bawtry and District Gas Company and South Yorkshire and Derbyshire Gas Company, between 1915 and 1952.  In 1948, the Gas Act 1948 transferred the site, rights and liabilities from the previous gas undertakers to the East Midlands Gas Board ("EMGB"). EMGB used the site for storage and distribution purposes until 1965, when the site was sold and redeveloped as a housing estate.

The EA identified two knowing permitters of the contaminated land as appropriate persons, namely NGG on the basis that it was liable for the acts of its statutory predecessors and one of the redevelopers of the site, Kenneth Jackson Ltd, which had obtained planning permission for residential development. However, Kenneth Jackson Ltd had been dissolved and could not be "found" for the purposes of the Regime, which left NGG as the sole knowing permitter.

The EA carried out the remediation itself and then, applying the statutory guidance, found that NGG was liable to contribute to a reasonable proportion of the remediation costs expended, which were in the region of £700,000.

If NGG were not, in fact, found to be knowing permitters, the EA accepted that liability would have passed to the current owners and occupiers of the houses on the housing estate. However, by virtue of Section 78J of the EPA 1990, owners and occupiers cannot be made liable for the remediation of water-related pollution and so the residents would only have been liable for the land-based contamination. In this case, though, the EA followed the statutory guidance which states that an enforcing authority should consider waiving or reducing its costs of recovery where a Class B [owners and occupiers] person satisfies the authority that, at the time the person purchased the dwelling, he did not know, and could not reasonably have been expected to have known, that the land was adversely affected by presence of a pollutant.  As the residents were found to have bought the land in good faith and had no notice of the existence of contamination the EA informed the residents that if NGG was not liable, it would not seek to recover any remediation costs from the residents.

So it was important for the EA to win this case otherwise the site would be an "orphan site" and the cost of the clean-up would have to be borne by the EA out of public, tax payers’ funds.

The High Court ruling

NGG judicially reviewed the EA's decision on the following grounds:

1. NGG did not itself cause the contamination and so could not amount to an "appropriate person" for the purposes of the Regime; and

2. the relevant gas transfer schemes transferred only those liabilities which were in existence (that is, had already crystallised) at the time of the transfer and therefore did not apply to any potential or contingent liabilities which crystallised later under subsequent legislation.

The High Court dismissed NGG's application and concluded as follows.

1. The provisions in Part IIA of the EPA 1990 should be given a purposive approach. Following the rules of statutory construction in Pepper v Hart (1993) AC 593, Parliament's clear intention was that liabilities accrued in respect of contamination caused by the relevant statutory predecessors (such as British Coal and British Gas) should be borne by their statutory successors.

2. The word "person" is construed to give effect to Parliament's clear intention that primary responsibility for the remediation of contaminated land under Part IIA of the EPA 1990 should fall on the original polluter in accordance with the "polluter pays" principle. The High Court took the view that the word "person" includes both the actual undertaking which caused or knowingly permitted the contamination and any body that has succeeded to the liabilities of that original undertaking under the relevant statutory schemes.

3. The relevant gas transfer schemes had transferred to NGG both existing and contingent liabilities accrued by its statutory predecessors. Liability under Part IIA of the EPA 1990 is retrospective and so can apply to contamination caused prior to those statutory provisions coming into force.  It was, therefore, not necessary to demonstrate that at the time the contamination was caused the relevant predecessor had already incurred liability in respect of contamination under the then applicable legislation.

The House of Lords decision

The House of Lords essentially ruled on two points:

• Is the definition of "appropriate person" in Part IIA of the EPA 1990 wide enough to cover a successor to the business of the original polluter?

• Do the references to "liabilities" in the transfer schemes made under the relevant Gas Acts apply to liabilities which did not exist at the date of those Acts (that is, liabilities arising under amendments made to the EPA 1990 by the Environment Act 1995)?

The House of Lords held as follows.

• The wording in Part IIA of the EPA 1990 is uncomplicated and easily understandable and so there is no need to resort to the rule in Pepper v Hart to look at the relevant Parliamentary debates.

• The emphasis in Part IIA is on the actual polluter.

• The liabilities transferred under the transfer schemes made under the relevant Gas Acts were limited to those existing "immediately before" the transfer date and so did not (and could not) include liabilities which arose in 1995 when the contaminated land regime was introduced.

• Those who invested in shares in British Gas at the time when the company was floated in the mid-1980s did so on the basis of the value of the company at the time, including all of its assets and liabilities. Those liabilities were limited to those in existence immediately before the date of the relevant transfer scheme.

• In the words of Lord Scott of Foscote:

"Parliament is, of course, sovereign and can impose what liabilities it sees fit on whom it chooses. But very careful language would be needed to impose on a company innocent of any polluting activity a liability to pay for works to remedy pollution caused by others to land it had never owned or had any interest in." (paragraph 20)

"I find it extraordinary and unacceptable that a public authority, a part of government, should seek to impose a liability on a private company, and thereby to reduce the value of the investment held by its shareholders, that falsifies the basis on which the original investors, the subscribers, were invited by government to subscribe for shares." (paragraph 22)

Comment

The decision by the House of Lords will relieve the gas industry as there are approximately 2000 other large former gasworks across the country which may require remediation as a result of contamination generated before relevant transfer schemes became effective.

However, other industries and undertakings which have been the subject of nationalisation, privatisation and local government re-organisation such as electricity, water and rail industries should take care and not place too much reliance on the case and its applicability to their own industries. Why? Because much will depend on the exact wording used in the relevant statutory transfer schemes.  Lord Neuberger of Abbotsbury pointed out in his judgment (see paragraph 35), that the wording used in the gas industry transfer schemes made it clear that the liabilities which were transferred to the successors were limited to those which existed at the date of the transfer, but not all statutory transfer schemes use the same language (see for example the wording used in the Water Act 1989).

The House of Lords' judgment has dealt the contaminated land regime a severe blow. Parliamentary debates at the time the Environment Bill was discussed show that Parliament clearly intended that liability for contamination caused by entities such as British Gas and British Coal should be borne by their statutory successors and that the Regime should give effect to the "polluter pays" principle.  In Parliament's mind, this meant statutory successors should step into the shoes of the original polluters.  The House of Lords has made it crystal clear that whilst Parliament has the right to do this, it will have to use very careful language to do so, and when the wording in Part IIA of the EPA 1990 and the relevant gas transfer schemes is looked at together, there is no such careful language.

It is argued that the Government's intention from the start has been that most of the contaminated land in the UK should be cleaned up under the planning regime and not the contaminated land regime, which is meant to be a fallback option.  Therefore, one might ask, has the House of Lords decision really dealt such a blow, in practice, to clean up operations after all? As long as land is cleaned up, it should not matter how that is achieved.  The difficulty is where the planning regime doesn't come into play. Where the contaminated land regime is all that is left, the use of public money may be the only option available to effect a clean up operation, and that will mean the taxpayer will be left with bill.