Perenco UK Ltd & Anor v Bond

This is an appeal from the Award of the Arbitrator, Mr R. E. O. MacKay FRICS FCIArb, made on 16 July 2015. The appeal is brought under s.69 of the Arbitration Act 1996. Leave to appeal was given by Carr J. on 24 February 2016.

The dispute centres on the construction of a deed made on 1 June 1994 (“the BG Deed”) between British Gas plc (“BG”) and Mr William Henry Bond.

The Deed granted an easement to BG, to whom Southern Gas Networks Plc (“SGN”) is the successor, to run a subsurface pipeline across land forming part of the Holme Estate at Wareham, Dorset which is owned by Mr Bond. On 23 September 1994, BP Exploration Operating Company Ltd. (“BP”), to whom Perenco UK Ltd. (“Perenco”) is successor, entered into a lease (“the BP Lease”) with Mr Bond for the subsoil of a strip of land to run their pipeline. This pipeline runs roughly in parallel to the BG pipeline.

For ease of reference, in this judgement, I will refer to the BG Deed and the BP Lease together as “the agreements” or “the two agreements” and, where I am concerned with the construction of the Deed, I will refer to “BG” and “BP” rather than to SGN and Perenco (although the latter are, of course, the parties to this appeal). It is common ground between the parties that the two agreements are part of the relevant factual background to the construction of each agreement – and indeed the two agreements refer to each other - as is the statutory background which I refer to below.

The surrounding land is exploited for the extraction of ball clay. Since at least the early 1960s, the land has been leased for these purposes and is currently leased by Imerys Minerals Ltd. (“Imerys”). It is not in dispute that the effect of the presence of the pipelines is to prevent the exploitation of the minerals in the parcels of land the subject of the BG Deed and the BP Lease so that these minerals (including ball clay, sand and gravel) are “sterilised” or “sequestered” to use the phrases adopted by the parties.

Nonetheless, on 12 October 2011, Mr Bond obtained planning permission to extract ball clay, sand and gravel from an extension of the land known as Dorey’s Pit and which it appears included the land where the minerals are so sterilised. By letters from his solicitors dated 30 November 2011 to BG and BP, Mr Bond gave notice that he, together with Imerys, intended to develop the land in accordance with the planning permission but that they were prevented from doing so by the presence of the BG and BP pipelines. He claimed compensation under the BG Deed and BP Lease under the provisions addressed below.

The easement under the BG Deed could have been acquired under schedule 3 to the Gas Act 1986:

The relevant terms of the Mining Code are as follows. Firstly, s.78 provides:

“(1)

If the mine owner of minerals lying under an area of protection as hereinafter defined is desirous of working any such minerals, he shall give to the company and also to the royalty owner (if any) notice of his intention so to do at least thirty days before the commencement of the works …..

(2)

If it appears to the company that the working of any of the minerals to which such notice relates will be likely to damage the railway or works or any part thereof, the company may, at any time after the receipt of such notice, give a counter-notice to the mine owner requiring him to leave unworked all or any part of such minerals, …

s.78A provides that the compensation shall, in default of agreement, be determined by arbitration, and provides the method for assessing compensation by reference to the value of the minerals. S. 85D(3) provides for the arbitrator, in default of agreement, to be appointed by the Board of Trade.

s.79(1) provides:

“If within thirty days from the service by a mine owner on the company of a notice of intention to work any minerals no counter-notice is served by the company, the mine owner may, after the expiration of those thirty days, and until a counter-notice is served, work any minerals to which the notice relates, so, nevertheless, that the same be done in the manner proper and necessary for the beneficial working thereof, and according to the usual manner of working such minerals in the district where the same shall be situated.”

s.85A is headed Power to vary rights by agreement and provides:

“Notwithstanding anything contained in this Act, as mine owner, a royalty owner and the company or any two of them may, by agreement, alter, extend, or otherwise vary their respective rights under the provisions of this Act with regard to any minerals to which this Act applies …..”

In summary, the effect of these provisions is that if a mine owner wishes to work any minerals (within an area of a railway), he must give 30 days notice of his intention to do so to the railway company. The railway company may give a counter-notice requiring the mine owner to leave the minerals unworked. In that case, the railway company becomes liable to pay compensation to the mine owner. If no such notice is given within the 30 day period, the mine owner 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, the railway company 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.

There is no dispute that under the Mining Code whether or not to give a counter notice – and when - is entirely within the discretion of the railway company (or, as in this case, pipeline owner).

In this case, rather than BG making a statutory acquisition of a right to run the pipeline across the land, the parties entered into a Deed. As will be seen, that Deed expressly incorporated the provisions of the Mining Code amended to refer to BG rather than a railway owner.

Under clause 1 Mr Bond, as Grantor, granted to British Gas plc easements to lay, construct, maintain, protect, use, replace, remove or render unusable a pipeline for the transmission of gas and to carry out any ancillary works in upon and over a defined strip of land. As I have said, SGN is the successor in title to BG.

Clause 3 included a number of covenants on behalf of the Grantor including “not to erect of install or cause or permit to be erected or installed any building or structure or permanent apparatus in through upon or over the said strip of land.”

Clause 5(i)(c) dealt with the position, amongst other things, where the Grantor obtained planning permission for building works but was prevented from carrying them out because of BG’s works and provided that if:

“(c)

the principal amount of compensation which would have been payable in respect of a compulsory acquisition by British Gas of the easements hereby granted in pursuance of a notice to treat served on the date hereof if such permission had previously been granted exceeds the sum set out in Clause 1 hereof [the payment for the easement] …..

then subject to the provisions of this clause British Gas will pay to the Grantor a sum equal to the excess.”

Clause 6 dealt with mining operations as follows:

“(ii)

Subject to the provisions of this Clause the provisions (in this Clause called “the said provisions”) substituted by Part II of and the First Second and Third Schedules to the Mines (Working Facilities and Support Act) 1923 for sections 78 to 85 of the Railways Clauses Consolidation Act 1845 shall be deemed to be incorporated herein.

(iii)

The said provisions shall be construed as if references to the Mine Owner were references to the Grantor references to the Company were references to British Gas references to any railway or works of the Company were references to the Works defined in Clause 1 hereof …..”

It is also rightly common ground between the parties,that these provisions fall to be construed as contractual terms.

The original parties to this Lease were Mr Bond, as Grantor, and BP Exploration Operating Company Ltd. Perenco was successor in title to BP. The relationship between the parties under the BP Lease was different from that under the BG Deed in that it created a 999 year lease of a strip of land including the subsoil for the purposes of BP’s running its pipelines.

In the case of BP, rights to run the pipeline could have been compulsorily acquired under the Pipe-lines Act 1962. Under section 14 of that Act, compensation would have been payable to the landowner if the value of his land was depreciated by the making of the compulsory rights order and in that amount.

Express provisions were included in the BP Lease for compensation for sterilised minerals. The Third Schedule to the Lease comprised the Diversion Provisions. Under clause 2 of the Diversion Provisions, if the Grantor desires to develop the Described Land (which as defined included the Demised Land), he is to supply details to the Grantee and there are provisions for co-operation between the two. Then under clause 2(2):

“If following such consultations:-

(a)

the Grantor obtains planning permission for the development but the same is prevented solely by reason of the position of the pipe-lines or solely by such position and the position of BGC’s [ie British Gas’] pipe-line as referred to in Clause 7 of this Deed or

(b)

planning permission for the development is refused solely by reason of the position of the pipe-lines or solely by such position and the position of BGC’s pipe-line as referred to in Clause 7 of this deed the Grantor shall give written notice to the Grantee stating whether or not the Grantor requires the diversion of the pipe-lines or part thereof whereupon the Grantee may in its unfettered discretion elect by notice in writing to be delivered within three months of the Grantor’s notice either:

(i)

to divert the pipe-lines or part thereof along the diversion route or

(ii)

to pay to the Grantor compensation for the loss of the value of any part of the land of the Owner by reason of the restriction of development due to the existence of the pipe-lines such compensation to be based on the value if the development were able to be carried out to be determined in default of agreement by an arbitrator to be agreed between the Grantor and the Grantee ….”

It is not in dispute that the words starting “the Grantor shall give written notice to the Grantee ….” apply to both limbs (a) and (b). On the express terms of the clause, therefore, in circumstances where the development is prevented either solely by reason of the position of the BP pipeline or solely by reason of both the BP pipeline and the BG pipeline, BP has three months from the giving of notice by the Grantor to elect to divert the pipeline or pay compensation. It can be seen that the BP Lease reflected the statutory background in that the compensation payable was to be assessed on the basis of the diminution in value of the land.

Both the BG Deed and the BP Lease contemplate the situation in which Mr Bond is entitled to compensation under both of the agreements and the BG Deed and the BP Lease both contain provisions to avoid double compensation.

Under the BG Deed, clause 7 provides as follows:

“INASMUCH as the Grantor has prior to the date hereof agreed to grant to BP Petroleum Development Limited (which Company and its successors and assigns are hereafter in this Clause referred to as “BP”) a Lease of land and rights (which Lease is hereinafter in this Clause referred to as “the BP Deed”) in respect of a pipeline intended to be laid approximately at the same time as and along a route parallel with that of the said works

Under the BP Lease (in which the BG Deed is referred to as the BGC Deed), Clause 7(3)(ii) provided:

“In relation to any such development as would be the subject of a payment of compensation by the Grantee in accordance with the Diversion Provisions and as would also be the subject of a payment of compensation by BGC under Clause 6 of the BGC Deed (hereinafter in this sub-clause called “common mining development”) there shall be ascertained by agreement or determination in the respective manner provisioned in the Diversion Provision and Clause 6 of the BGC Deed the amounts (hereinafter called “the two amounts”) of the compensation which would be payable in respect of the common mining development by respectively the Grantee under the Diversion Provisions and by BGC under the said Clause 6 and the amount actually payable by the Grantee under the Diversion Provisions in respect of the common mining development shall be equal to one half of the greater of the two amounts.”

The effect of clause 7(4) of the BG Deed and of clause 7(3)(ii) of the BP Lease is that, if compensation is payable under both the BG Deed and the BP Lease in respect of a common mining development, the Grantor, Mr Bond would recover only the greater of the two amounts and each of (now) SGN and Perenco would pay half of that amount. However, neither the Diversion Provisions nor clause 7 of the BG Deed provide expressly either that, if a development is the subject of compensation under one of the agreements, it is also to be the subject of compensation under the other or that that there are specific circumstances in which that would be the case. That is so despite the fact that the BP Lease contemplates the payment of compensation under that agreement when a development is prevented because of the combined effect of the position of the BP and BG pipelines. Rather the provisions, as drafted, apply if a development is the subject of compensation under both agreements.

As I said above, Mr Bond has given notice requiring compensation to paid. Under the terms of the Diversion Provisions, Perenco was required to give notice within 3 months to pay compensation if it did not want to divert its pipeline. Perenco did so on 24 February 2012. In their skeleton argument in support of the application for permission to appeal, the Appellants told the Court that Perenco had paid £287,525 (plus interest) as compensation being its assessment of the diminution in value.

SGN has not, however, served any counter-notice and has, therefore, not, on its case, come under any obligation to pay compensation. SGN’s position quite simply is that it is not obliged to serve a counter notice – that would have been the position under the Mining Code and if there had been a statutory acquisition and it is equally the position under the Mining Code as incorporated into the Deed.

In the skeleton argument referred to above, SGN give the sum claimed under the BG Deed and the Mining Code as £2,382,817. That is significantly more than is payable under the BP Lease and it can readily be seen that that may well be the case where under one agreement the compensation is assessed by reference to diminution in value of the land and under the other by reference to the value of the minerals that cannot be exploited. However, in the course of argument, Mr Robinson, on behalf of Mr Bond, also pointed out that it would not always or necessarily be the case that the compensation payable under each of the BG Deed and the BP Lease would be significantly different.

Mr Bond’s claim for compensation from both Perenco and SGN was the subject of the arbitration.

In the Statement of Claim, served on 4 August 2014, Mr Bond contended that there was an implied term “that BG would serve a counter notice in the event that the proposed works would interfere with its pipe”. SGN denied the existence of such an implied term contending that it contradicted the express term of the Mining Code that provided for it to serve a counter notice “at any time” of its own choosing.

The parties agreed that the Arbitrator should determine a series of preliminary issues with the aid of a Legal Adviser:

The issues referred to the Legal Adviser concerned 2 issues about the calculation of the compensation payable by Perenco and 2 issues relating to the construction of and measure of compensation under clause 5(i) of the BG Deed. No complaint is made about the Legal Adviser’s Advice or the Award in these respects.

Issue 5 was framed as follows:

“(a)

Should a term be implied into the BG Deed that the owner of the pipeline is obliged to serve a Mining Code counter-notice if the landowner wishes to do works which would interfere with the pipeline (Claimants’ Statement of Case: paragraph 3.4(ii))?

(b)

Can no such term be implied (SGN’s Statement of Case: paragraph 23)?”

That formulation, therefore, reflected in terms the way the implied term contended for had been formulated in Mr Bond’s Statement of Case.

In his submission dated 5 January 2015, Mr Bond’s case was developed in these terms:

“The Claimants contend that a term should be implied into the BG Deed to the effect that in circumstances in which a notice has been served under s.78(1) 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.”

The particular circumstances to which the term was alleged to relate were thus more specifically defined and the nature of the term was put somewhat differently.

The Legal Adviser concluded and the Arbitrator, therefore, found that there was an implied term which I set out below and which was of a similar, if not, identical nature to that contended for by Mr Bond.

The Legal Adviser’s conclusion turned primarily on the following considerations. I quote them at some length as they were, it seems to me, both key to the Legal Adviser’s conclusion and were heavily relied upon on behalf of Mr Bond in the argument before me:

In the Legal Adviser’s opinion a term was, therefore, to be, implied to ensure that compensation was paid under the BG Deed in these circumstances. The Legal Adviser set out a “re-write” of clause 6(ii) as if it set out relevant sections of the Mining Code in full together with the implied term and other consequential changes (to refer to the circumstances where a counter-notice was deemed to have been served). Clause 6(ii)(b) in the re-write thus read as follows:

The principles applicable to implied terms were recently restated in Marks and Spencer v BNP Paribas [2015] UKSC 72. Lord Neuberger reiterated the statements of principle derived from Lord Simon’s speech in BP Refinery (Westenport) Pty Ltd. v Shire of Hastings (1977) 180 CLR 266, 282 – 283 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.

Lord Neuberger then set out six qualifications to those principles at [21]:

“First, in Equitable Life Assurance Society v Hyman [2002] 1 AC 408, 459, Lord Steyn rightly observed that the implication of a term was “not critically dependent on proof of an actual intention of the parties” when negotiating the contract. If one approaches the question by reference to what the parties would have agreed, one is not strictly concerned with the hypothetical answer of the actual parties but with that of notional reasonable people in the position of the parties at the time at which they were contracting.

Secondly, a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it is it had been suggested to them. Those are necessary but not sufficient grounds for including a term.

However, and thirdly, it is questionable whether Lord Simon’s first requirement, reasonableness and equitableness, will usually, if ever, add anything: if a term satisfies the other requirements, it is hard o think that it would not be reasonable and equitable.

Fourthly, as Lord Hoffman I think suggested in Attorney General of Belize v Belize Telecom Ltd. [2009] 1 WLR 1988, para. 27, although Lord Simon’s requirements are otherwise cumulative, I would accept that business necessity and obviousness, his second and third requirements, can be alternatives in the sense that only one of them needs to be satisfied, although I suspect that in practice it would be a rare case where only one of those two requirements would be satisfied.

Fifthly, if one approaches the issue by reference to the officious bystander, it is “vital to formulate the questions to be posed by [him] with the utmost care, to quote from Lewison, The Interpretation of Contracts, 5^th ed. (2011), p 300, para. 6.09.

Sixthly, necessity for business efficacy involves a value judgment. It is rightly common ground on this appeal that the test is not one of “absolute necessity”, not least because the necessity is judged by reference to business efficacy. It may well be that a more helpful way of putting Lord Simon’s second requirement is, as suggested by Lord Sumption JSC in argument, that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.”

The Appellants make 7 primary points which I summarise as follows:

As I have said above, Mr Robinson, for the Respondent, relied heavily on the arguments advanced in the Legal Adviser’s Final Advice which I have already set out above.

It is, I think, accepted by both the Legal Adviser and the Respondent that, in isolation, the incorporation of the Mining Code into clause 6 of the BG Deed works perfectly well and achieves the same result as would have been achieved if there had been a statutory acquisition of rights: there is no need for the proviso. The thrust of the Respondent’s case (and the Legal Adviser’s reasoning) is, however, that it is necessary to give the BG Deed business efficacy, in the sense of commercial or practical coherence, when taken together with the BP Lease and/or that it goes without saying. It is argued that:

The first of the Respondent’s points above does not, to my mind, hold water because it is inconsistent with the incorporation into the Deed of the Mining Code which the parties accept does not require the pipeline owner to give a counter-notice and which permits him to give a counter-notice at any time.

The second point exposes, in my judgment, the difficulty with the Respondent’s argument. It assumes that the intention of the parties to the BG Deed and/or BG and BP was that, in the event of a notice being given by the landowner, and in circumstances where neither party wished to divert its pipeline, (i) both BG (now SGN) and BP (now Perenco) would become liable to pay compensation, (ii) that, if there was a difference in the amounts payable under the two agreements, Mr Bond would be entitled to the greater amount and (iii) that payment of that amount would be shared between BG and BP.

This seems to me to involve a number of assumptions about what the commercial effect of the two agreements was intended to be. It is the sort of scenario in which the argument is not “critically dependent” on proof of the actual intention of the parties but where one is concerned with what notional reasonable people would have agreed if in the position of the parties at the time of contracting. If the intention of those notional parties had been that the two agreements should match each other so as to ensure that in any case where a counter-notice was served under one it was also served under the other, then one might have expected the provisions of the two agreements to follow the same pattern, whereas they are, in fact, significantly different.

The statutory background is of relevance here in two respects. Firstly, against the background that the Mining Code gives the railway company the option to serve a counter-notice or not and to serve it at any time, it might have been expected that if there were circumstances under the BG Deed in which it was required to do so, that would have been spelt out but it was not. In this context, it is also relevant that the Mining Code has been the subject of express change in the Deed, insofar as the arbitration provisions are concerned, demonstrating that the adaptation of the Mining Code to the particular circumstances of the Deed has been considered.

Mr Bond, of course, would say that the circumstances in which BG must serve or is deemed to have served a counter-notice are not spelt out because it is so obvious that it goes without saying. But there, the second point about the statutory background comes into play: as Mr Wonnacott QC put it simply, why would BG have entered into a Deed that put themselves in a less advantageous position than they would have been in if they had made a statutory acquisition?

Both these matters, to my mind, cast considerable doubt on the intention of the parties that must be contended for by the Respondent. Further, the fact that, where it is surface building works that are in issue, there is no sharing of the burden of compensation must cast doubt on any assumption that a sharing of the burden was necessarily the intention where a mining development was prevented by the presence of the BG and BP pipelines.

Having said that, the argument in favour of the implication of the term is that it is unrealistic to think that what the parties intended was that BG could simply wait and see whether BP served a counter-notice and, in that way, avoid paying compensation. In the scenario in which both pipelines were still operational, BG could always do this, it is argued, with the result that clause 7(4) of the BG Deed would never come into play. It is this position that seems to have significantly influenced the view of the Legal Adviser and it is relied on heavily by the respondent. As Mr Wonnacott QC points out, however, the fact that the circumstance where both parties are liable to pay compensation is catered for in the Deed does not lead to the conclusion that this is the position the parties anticipate in any or all situations. Further, since BP is not obliged to tell BG if it has served a counter notice, it might do so but not tell BG, leaving BG to take the risk as to whether to serve a counter-notice or not. BP might take that course because, even if the amount payable under the BG Deed was more than the amount payable under the BP Lease, the half payable by BP, in the event that clause 7(4) came into play, might be less than the amount payable by BP alone.

Taking all these arguments into consideration, it seems to me that although if BP and BG (or the notional contracting parties) had had the particular scenario contemplated in the putative implied term put to them, they might have agreed some other provisions to cater for the scenario, it is not at all clear either that they intended something other than what was expressly agreed or that what they intended was that Mr Bond would necessarily be entitled to the greater level of compensation with payment being split between BG and BP. If the intention of BG and BP had been that, if Mr Bond served a notice of his intention to work the minerals and BG and BP’s pipelines were operational, thereby preventing the exploitation of the minerals, they would both pay half of the greater of the value of the minerals and the diminution in value of the land, a clause that said so might have been expected in both agreements rather than the incorporation of the Mining Code and the Diversion Provisions. It does not assist the Respondent’s argument that in some circumstances there might be no difference in the compensation payable under each agreement since in those circumstances, Mr Bond would be compensated and it would not be his concern how that compensation was allocated between BG and BP.

For all these reasons, the implied term does not seem to me to be one which is either necessary to give the BG Deed business efficacy or one that goes without saying.

I should add that whilst the complexity of the putative implied term is not in itself a bar to its implication and can properly be said to reflect the limited circumstances in which it is argued to be material, it does seem to me that the fact that the Deed was professionally drafted and that the implied term itself then passed through a number of iterations adds weight to the argument that it does not “go without saying”. The fact that the implied term also contradicts the express provision under s. 78 that BG may serve a counter-notice “at any time” might have been sufficient reason alone not to imply such a term and it certainly gives further support to my conclusion that the term does not go without saying.

I therefore allow the appeal against the Arbitrator’s award on issue no. 5.

Having provided this judgment in draft, I invited the parties to consider whether any further matters in writing. I am grateful to them for having done so and for having agreed the following directions which I make inviting the parties to make further written submissions as to the form of the order, costs and any application for permission to appeal:

The Appellants shall file and serve their written submissions on costs and the form of the order to be made by no later than 5.00pm on Wednesday 6 July 2016.

The Respondents shall file and serve their written submissions in reply on costs and the form of the order to be made, together with any application seeking leave to appeal together with any submissions, by no later than 5.00pm on Wednesday 13 July 2016.

The Appellants shall file and serve any written submissions in reply to an application for leave to appeal by no later than 5.00pm on Wednesday 20 July 2016.

The application for leave to appeal (if any) shall thereafter be determined on the papers together with the Court’s decision as to costs.

Should any application for leave to appeal be refused, the Appellant shall file any renewed application for permission with the Court of Appeal within 21 days of the Order refusing leave.