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On 28 July, in one of the last judgments to be handed down in the Trinity Court term, the Supreme Court dismissed the appeal brought by Mohammed Al-Fayed’s company, Bocardo SA, against a decision to award only nominal damages for trespass against an oil company that drilled without permission underneath Al-Fayed’s estate in Surrey.  

The Court of Appeal had reduced the damages awarded by Mr Justice Peter Smith at first instance from £620,000 to £1,000, and Mr Al-Fayed was hoping this would be overturned, despite the fact that the drilling had not caused any actual damage to his property.  By a 3-2 majority, the Supreme Court upheld the Court of Appeal’s award and confirmed that compensation for landowners who suffer trespass from oil exploration should be evaluated in the same way as in cases of compulsory land purchase (in other words, by applying a very limited statutory measure of damages). 

The facts of this interesting and unusual case are set out in the preview posted on this Blog back in June.  In short, Star Energy had a licence from the Crown under s.2 of the Petroleum Production Act 1934 (the “1934 Act”) to exploit the Palmers Wood field, part of which lies beneath the Oxted Estate, owned by Mr Al-Fayed through his company Bocardo SA.  However, Star Energy did not have any permission from Bocardo to drill three wells (ranging from 800 to 1,300 foot deep) deep beneath its land, since Star Energy’s predecessors had not negotiated any contractual licence with Bocardo, nor applied to Court for an ancillary right of access under The Mines (Working Facilities and Support Act) 1966 (the “1966 Act”).  By the time Bocardo learned of the existence of the wells, some £10m worth of oil had been pumped from under its land, and in 2006 Bocardo brought proceedings seeking damages for unlawful trespass amounting to 12.5% of this value, notwithstanding the fact that the drilling had not caused any damage whatsoever to the estate. 

The issues for the Supreme Court to decide were: (1) whether the drilling of wells in the sub-strata below Bocardo’s land could constitute an actionable trespass, and if so (2) what the correct measure of damages should be. 

How far down do ownership rights extend under English law?

On the first issue, Lords Hope, Walker, Brown, Collins and Clarke unanimously agreed with the Court of Appeal and the High Court that Star Energy’s actions did consitute an unlawful trespass.  Lord Hope (giving the judgment of the Court on this first issue) conducted a detailed and entertaining analysis of exactly how far up and, as in this case, how far down a landowner’s rights can extend.  The law in most common law jurisdictions is derived from the Roman principle cuius est solum, eius est usque ad coelum et ad inferus – the landowner owns everything up to the sky and down to the centre of the earth.  Whilst Lord Hope considered that principle is still a useful starting point, it is an “imperfect guide” in the modern world, since (for example) it now only applies to airspace up to a height which may interfere with the ordinary enjoyment of the land (Bernstein of Leigh (Baron) v Skyviews & General Ltd [1978] QB 479).  And if property rights continued down as far as the core of the earth, landowners would all have a “lot of neighbours“.  Clearly, the line needs to be drawn somewhere, and their Lordships drew it as follows: ”the owner of the surface is the owner of the strata beneath it, including the minerals that are to be found there, unless there has been an alienation of them by a conveyance, at common law or by statute to someone else“, going down as far as “the point at which physical features such as pressure and temperature render the concept of the strata belonging to anybody so absurd as to be not worth arguing about“.  This was plenty deep enough in their Lordships’ eys to include the substrata 1,300 foot below the Oxted Estate, which accordingly belonged to Bocardo.

The next question was whether, as Star Energy argued, its licence to exploit the oil from the Crown could act as a defence to the prima facie trespass.  By virtue of the 1934 Act, title to all oil and gas deposits in the UK belongs to the Crown: in this case, the Crown had granted a licence to Star Energy under s.2(1) to “search and bore for and get” the oil from the Palmer’s Wood field.  But whilst Star Energy was properly the owner of the oil, there was nothing in the statute that automatically granted it a right of access through Bocardo’s substrata.  That right of access could only be granted by direct negotiation with the landowner, or by an application for an ancillary right under the 1966 Act.  In this case, neither had occurred, and accordingly their Lordships determined (dismissing its cross-appeal) that Star Energy had unlawfully intruded on Bocardo’s land.

The correct measure of damages under s.8(2) of the 1966 Act

The real battleground in this case was quantum.  s.8(2) of the 1966 Act provides a statutory framework for compensating landowners under whose property oil & gas is extracted under licence: such compensation “shall be assessed by the court on the basis of what would be fair and reasonable between a willing grantor and a willing grantee, having regard to the conditions subject to which the right is or is to be granted.”  Bocardo argued (and Peter Smith J agreed, when awarding 9% of the revenues from Palmer’s Wood) that in this hypothetical calculation of value, the Court should have regard to the “key value” or unique bargaining position enjoyed by Bocardo, i.e. that only through its substrata (otherwise worthless) could this valuable oil field be accessed: and in such a negotiation, Bocardo would have been able to insist on a significant share of the profits. 

However, Lord Brown (with whom Lords Walker and Collins agreed) accepted Star Energy’s submission that in effect the 1966 Act provided for a compulsory purchase from Bocardo of a right of access, and so the damages should be based on the well-established case law relating to compulsory land purchases.  It is a key principle of compulsory purchase valuations that “compensation for the compulsory acquisition of land cannot include an increase of value which is entirely due to the scheme underlying the acquisition” (the so-called ‘no-scheme’ rule laid down in the Pointe Gourde case (1947 AC 565), and recently upheld by the House of Lords in Waters v Welsh Development Agency [2004] 1 WLR 1304): in other words, the value is not what the grantee is gaining, but what the grantor is losing.   Since Bocardo had no right to the oil beneath its land, it had no “key value” to bring to the negotiation.  Lord Brown summarised the position as follows:

“The correct analysis seems to me to be this: that by these provisions [i.e the 1934 and 1966 Acts] Parliament was at one and the same time extinguishing whatever pre-existing key value Bocardo’s land may be thought to have had in the open market and creating a new world in which only the Crown and its licencees had any interest in accessing the oilfield and in which they had been empowered to do so (to turn the key if one wants to persist in the metaphor) compulsorily and thus on terms subject to the Pointe Gourde approach to compensation.”

Accordingly, Bocardo’s appeal on quantum was dismissed, and the Court of Appeal’s determination that the compulsory purchase value of an access right through the substrata was £1,000 was upheld (with Lord Brown adding his view that this was “positively generous” in the circumstances).  In fact, this was a close run thing: Lords Hope and Clarke were not persuaded by the analysis of the majority on quantum, and felt that the geographical location of the apex of the Palmer’s Wood field beneath Bocardo’s land did provide a key value which should be taken into account.  However, this may be of scant consolation to Mr Al-Fayed, who despite the millions of barrels of oil underneath his feet and four years of litigation before the English Courts, was left with a somewhat pyrrhic victory on his hands: £1,000, and more legal bills to pay.