The recent House of Lords decision in R (National Grid Gas Plc) v Environment Agency is of great significance to utility companies that might have contaminated land liabilities. The case is also potentially very disappointing for developers or other landowners that might have, or have had, land interests in sites that were formerly used and contaminated by statutory undertakers.

The case was an appeal, using the leapfrog procedure, directly from the High Court to the House of Lords and involved a dispute between National Grid Gas Plc (National Grid (previously Transco Plc)) and the Environment Agency (the Agency) in respect of a former gasworks site in Bawtry, Doncaster.

As we reported in the July/August 2006 environment briefing (IHL142, p50), the High Court had comprehensively dismissed National Grid’s contention that the Agency did not have any legitimate grounds for holding it to be an ‘appropriate person’ under the contaminated land regime and therefore accountable for the actions of its predecessors.

However, in the House of Lords their lordships found the opposite – that National Grid was not an appropriate person under the contaminated land regime, and that as liabilities did not exist at the time of the statutory transfers through the Gas Acts they could not be deemed to have transferred to National Grid.

As with any case, the Bawtry judgment turned on the facts. Statutory undertakers, as well as developers, landowners and occupiers of sites that may have been contaminated by the activities of statutory undertakers, therefore need to have an appreciation of the details of this case and its implications.

Key issues on appeal

Their lordships had to consider two key questions:

a) whether the definition of ‘an appropriate person’ under the Environmental Protection Act 1990 (EPA 1990) was wide enough to cover a successor to the business of the original polluter; and

b) whether the references to ‘liabilities’ in s17(1) of the Gas Act 1948 and s49(1) of the Gas Act 1986, which applied on nationalisation and privatisation of the gas industry, could possibly apply to liabilities that were created long after nationalisation and privatisation took place.

Prior to looking at the arguments in this case and the reasoning behind their lordships’ judgment, to aid an understanding of the issues involved, we have provided a little background on the site and companies involved in this case (see box, ‘Ownership of the Bawtry site and key facts’, right). We have also provided a very brief summary of the contaminated land regime, setting out how appropriate persons are identified, to put this case into context.

The Contaminated Land Regime and the Bawtry Site

Part II A of the EPA deals with the identification of ‘contaminated land’, with ‘remediation’ of contaminated land and with the determination of the appropriate person to bear responsibility for remediation. In summary, under the contaminated land regime, local authorities are under a duty to inspect land in their area to identify ‘contaminated land’.

Contaminated land is defined as any land which, by reason of the substances in, on or under the land, appears to be in such a condition that either:

• significant harm to the environment or human health is being caused or there is significant possibility of such harm being caused; or
• water pollution is being or is likely to be caused.

Having identified a site as contaminated land, a local authority (or in the case of a special site where there is a risk of water contamination, the Agency) is under a duty to find and serve a remediation notice on appropriate persons, unless they carry out the remediation on a voluntary basis. The statutory regime sets out complicated rules on allocation of liability for remediating contaminated land.

Liability for remediation rests, in the first place, with those who caused or knowingly permitted the contamination (known as ‘Class A appropriate persons’). If no Class A appropriate persons can be found, liability passes to the owners and/or occupiers of the land, even if those persons were not responsible for the contamination or were unaware of its existence (‘Class B appropriate persons’). The statutory guidance sets out complex rules on the exclusion and appointment of liability for Class A and Class B appropriate persons.

The Bawtry site had been determined by the Agency to be a special site, because the contaminating substances present on the site affected controlled waters which fell within the contaminated land regime.

The Agency has a discretion, having regard to hardship that recovery might cause, to decide not to recover the whole or part of its costs from a particular appropriate person. In the present case the Agency made it clear that it did not intend to pursue any of the present owners or occupiers of the 11 residences for recovery of the cost of the remediation works it had carried out at their respective properties.

Clean-up of site and cost of remediation works

The presence of coal tar beneath the gardens at the Bawtry site was considered by the Agency to constitute contamination in that it is potentially harmful to health. The Agency formed an undisputed opinion that the remediation works to remove the contaminating material needed to be carried out. The Agency, pursuant to its duties and responsibilities under the contaminated land regime, carried out the necessary works itself, at a cost of approximately £66,000 per residence. The question was who should bear that cost.

Answers to key questions

Identification of ‘appropriate persons’ under the contaminated land regime

The first key question in this case was whether National Grid could be an appropriate person against whom a remediation notice might be served under s78E of the EPA. Section 78F(2) defines an appropriate person as one who:

‘… caused or knowingly permitted the substances… by reason of which the contaminated land in question is such land, to be in, on or under that land.’

In looking at this question their lordships had to consider the fact that National Grid itself did not cause or knowingly permit any substances to be in, on or under the land. Causing or knowingly permitting any contamination had involved the EMGB or its predecessor gas undertakers, many years before National Grid came into existence.

The Agency had identified four potential appropriate persons, but knocked these out, as set out below:

• B&DGC and SY&DGC would, if they had still been in existence, been Class A appropriate persons as they were both polluters – however, they had long since been dissolved.
• EMGB, a third polluter, would also have been a Class A appropriate person – however, it was dissolved after the 1986 privatisation of the gas industry.
• Kenton Homes Ltd and Kenneth Jackson Ltd would arguably have been Class A appropriate persons, as they were ‘knowing permitters’ of the presence of the coal tar under the site – however, both of these companies had been dissolved.
• In the absence of any Class A persons, the present owners and occupiers of the 11 residences would have been Class B appropriate persons, but the Agency decided not to pursue them.

Instead, the Agency chose to pursue National Grid as an appropriate person, even though it had neither caused or knowingly permitted the coal tar to be buried at the Bawtry site (as with the current owners and occupiers) and came into existence some 20 years after the Bawtry site had been sold for housing. The Agency argued that National Grid was an ‘appropriate person’ as the contamination was caused by one or more of its statutory predecessors.

National Grid was the only target at which the Agency was directing its cost recovery effort. If the Agency missed that target, the cost would fall on public funds.

Was National Grid an ‘appropriate person’ under the contaminated land regime?

The Agency argued that the word ‘person’ in s78 of the EPA 1990, as in the phrase ‘person… who caused or knowingly permitted’ should be construed so as to include every person who became by statute the successor to the liabilities of the actual polluters, ie B&DGC, SY&DGC and EMGB, as well as National Grid (see box, ‘Ownership of Bawtry site and key facts’, p97, for further details).

Their lordships considered that the Agency’s contention was a quite impossible construction to place on the uncomplicated and easily understandable statutory language. Their reasoning was that the emphasis in s78 is on the actual polluter, the person who ‘caused or knowingly permitted’. The suggested construction was said to make nonsense of the language of the statutory provisions under which, upon nationalisation in 1948, the liabilities of the private gas undertakers were transferred to the state-owned Area Boards and, upon privatisation in 1986, the liabilities of the state owned Area Boards were transferred to British Gas plc.

Their lordships had no doubt that the EPA 1990 (with the 1995 amendments relating to contaminated land) had been enacted on the principle that the polluter should pay and that innocent owners or occupiers of contaminated land should not have to pay. However, they considered that National Grid was not a polluter and was no less innocent of having ‘caused or knowingly permitted’ the pollution than the innocent owners or occupiers of the 11 residences.

Liabilities arising under the Gas Acts

As mentioned above, it is not known exactly when the coal tar residues were buried at the site. It seemed probable that most of this happened when the site was in private ownership before nationalisation, but some may have happened while the site was owned by EMGB.

Section 17(1) of the Gas Act 1948 provided that:

‘… all property, rights, liabilities and obligations which, immediately before [our emphasis] were property, rights, liabilities and obligations of an undertaker (eg B&DGC and SY&DGC)… shall on the vesting date vest by virtue of this Act and without further assurance in such Area Board as may be determined by order of the Minister.’

By the Gas Act 1972 the Area Gas Boards were abolished and their property, rights, liabilities and obligations were transferred to the British Gas Corporation (the BGC), which remained in state ownership. So, the BGC became subject to any liabilities of EMGB arising out of its previous ownership of the Bawtry site or inherited under s17(1) of the 1948 Act from B&DGC and SY&DGC.

Privatisation of the gas industry was effected by the Gas Act 1986. A ‘successor company’, in this event British Gas plc, was formed, public subscription in this new company was invited by the government and the transfer to this successor company, British Gas plc, of BGC’s assets and liabilities was effected by s49 of the 1986 Act.

Section 49(1) of the Gas Act 1986 stated:

‘… on a transfer date to be nominated by the Secretary of State… all the property, rights and liabilities to which [BGC] was entitled or subject immediately before [our emphasis] that date shall… become by virtue of this section property, rights and liabilities of… [the successor company]…’

Having looked at the working of the Gas Acts, the next question was whether National Grid could be responsible for liabilities that were created long after nationalisation under the Gas Acts.

Could National Grid be responsible for liabilities created after/nationalisation?

The Agency argued that since British Gas plc was the transferee and so had the benefit of the assets of EMGB, which might be taken as including the proceeds arising from the sale of the Bawtry site, it was right and fair that British Gas plc’s successor, Transco (now National Grid Gas plc), should bear any liabilities relating to the site.

Their lordships questioned whether the liabilities imposed on British Gas plc by the 1986 Act were the liabilities existing immediately before the date of transfer and whether those liabilities could include liabilities coming into existence some nine years later, under the 1995 amendment to the contaminated land provisions in the EPA 1990.

An additional matter that their lordships considered was whether the Agency’s attempt to cast the burden of paying for the remediation works onto National Grid falsified the basis on which the investing public were invited to subscribe in shares for British Gas plc. Their lordships argued that the investing public were entitled to believe that the liabilities of the new company, identified in the prospectus that accompanied the flotation, were limited to those existing immediately before the date of transfer. Their lordships thought that the investing public would have subscribed for shares in that belief and the Treasury would have benefited accordingly from the representations that had been made by the government to the investing public.

Their lordships did not support the argument that a part of government should seek to impose a liability on a private company and thereby reduce the value of the investment held by its shareholders, as this would falsify the basis on which the original investors (the subscribers), were invited by government to subscribe for shares. Their lordships did not think that Parliament intended to produce that result.

Lord Neuberger of Abbotsbury went on to say that where the polluter has ceased to exist in other situations and the whole of its business, or at least the whole of its relevant business, has been acquired by another company, it might well appear to many people to be similarly justifiable, at least in some circumstances, if liability for decontamination was extended to apply to that other company. However, he said that, to other people, it might appear that the imposition of such a liability would be an unjustified and unfair extension of the principle that the polluter pays. He argued that the circumstances and the basis of extending the concept of a polluter paying in such a way was a matter of policy for the legislature, not for the courts.

Lord Neuberger’s comments have given rise to a significant concern for National Grid and other similar companies that have obtained interests in land through statutory transfers, as these companies do not wish to see a revision of the contaminated land regime to extend it in this way.

Conclusion

The Agency failed in this case to make out its contention that the definition of ‘an appropriate person’ in the contaminated land regime was wide enough to cover a successor to the business of the original polluter. The Agency was also unsuccessful in its argument that there could have been a transfer to National Grid of liabilities under the Gas Acts of 1948 and 1986. Those liabilities did not exist and could not have existed at the date of those Acts, as they arose under amendments effected to the contaminated land regime in 1995.

A number of publicly listed companies and others have come into existence as a result of statutory transfers in a similar way to National Grid (such as rail companies, gas companies, water companies and others) and this case is of considerable significance to them. Had their lordships reached a different judgment, such companies could have been looking at substantial potential liabilities for sites contaminated by their predecessors which had been transferred under statutory provisions.

Furthermore, many companies and individuals who have purchased or leased land from such statutory undertakers will be disappointed by the findings in this case, as they will have been hoping to hold National Grid, and other similar companies, liable for contamination caused by their predecessors.

It is important to recognise that there will be clear distinctions between this case and other cases relating to contaminated land, although their lordships’ reasoning is informative in looking at other contaminated land cases. As mentioned above, there are rumours that legislation may be introduced to address the question of how liabilities for contamination by gas companies (or similar companies) that took place many years ago can be apportioned fairly. As National Grid pointed out, the issues in this case concern a further 2,000 gasworks sites across the UK, so the impact of the decision cannot be underestimated.

In view of this case, developers, landowners and anyone else with interests in contaminated sites previously owned by companies that were subsequently privatised, or where that land ownership was subject to a statutory transfer, should look again at the question of whether the relevant liabilities existed at the time of the transfer of ownership of the site from one company to another and whether they could argue for recovery of remediation costs.

R (National Grid Gas Plc) v Environment Agency [2007] UKHL 30

Georgie Messent is a partner in the Environmental Law Unit at Burges Salmon. She is rated in Chambers & Partners Legal Directory as a leader in her field and is included in the International Who’s Who of Environment Lawyers. Her practice includes advising on all environmental aspects of corporate, banking and property transactions, defence of civil claims and criminal prosecutions and advising clients on environmental regulatory matters, environmental insurance and emissions trading. Georgie is a co-author of the Sweet & Maxwell practitioner series text entitled Property Transactions: Planning and Environment.