Shell Was Able to Recover Damages for the Damaged Property

Relevant Factual Matrix

At or about 6 am on Sunday the 11th of December 2005 a number of explosions occurred at the Buncefield Oil Storage Depot based in Hertfordshire. The explosions were massive measuring 2.4 on the Richter scale and capable of being heard some 200km away. The cause of the explosion appears to be the cumulative effect of an unexpected series of errors which are set out below.

In accordance with its purpose the depot stored large quantities of fuel and the night before the explosion occurred fuel was being pumped into one of the tanks as per standard procedure. However on the night of the incident the measuring gauge became stuck at 96 per cent meaning fuel continued to pump in to the tanks until it inevitably overflowed.

At the point when the fuel overflowed a back up switch should have been engaged which was designed to cut-off the fuel in this situation. Yet crucially staff working at the depot at the time had failed to notice that the back-up switch had been disabled during the testing process and unfortunately it failed to operate.

Surprisingly the fuel which overflowed was released not as a liquid but as a fine white vapour which quickly accumulated around the site. A tanker driver noticed the strong smell and alerted the duty supervisor, Mr Nash who was working at the depot at the time. Upon being notified Mr Nash mistakenly shut off the wrong pump.

When the vapour had reached around 7 metres high the mist ignited and a massive explosion ensued. A large fire engulfed a high proportion of the site and burned for several days, injuring 43 people whilst luckily causing no fatalities. The fire caused significant damage to both commercial and residential properties and businesses in the vicinity.

The obvious Defendants to pursue were those who were running and therefore responsible for the depot at the time that the incident occurred. The other was the party responsible for the “back-up” mechanism which failed to operate when the tank overflowed. This pointed to two companies, Total (T) and Chevron and TAV Engineering (C) who were part of a joint venture, Hertfordshire Oil Storage Ltd (HOSL).

The important Claimants to note were UKOP Limited (UKOP) and WLPS Limited (WLPS). These were non-trading companies with no employees, assets or profits. However the companies did possess legal title to a number of pipelines and storage tanks. This property and the subsequent loss flowing from the damage to that property formed the basis of this part of the claim. UKOP and WLPS held the pipelines and storage tanks as “bare trustees” for a number of companies which included Shell.

Shell had suffered economic loss after the explosion as it was unable to use the pipelines and storage tanks to supply aviation and ground fuel to its customers at the usual rate. As a result, Shell brought proceedings against T under the umbrella of tort, claiming specifically in negligence, nuisance and through Rylands v Fletcher [1] .

Legal Issues in Dispute

The legal issues that arose were complex and plentiful. The nature of a beneficiary’s interest under a trust became relevant to the third outstanding issue which was considered at the first instance trial. This was whether all of the loss suffered by the numerous businesses, which included Shell, was recoverable. Whilst Shell was able to recover damages for the damaged property the situation became more problematic as Shell was also claiming for the consequential loss sustained from not being able to use the damaged property and this loss was purely economic.

This was an issue which had been considered by the House of Lords over 20 years before and the traditional approach of the English Courts was to refuse to allow recovery in cases of pure economic loss unless the loss was a foreseeable consequence of physical injury to the Claimant or the Claimant’s property. However the general rule was subject to a number of exceptions such as in the renowned decision of Hedley Byrne v Heller [1964] [2] where the House of Lords opined that economic loss could be recoverable if it resulted from negligent misstatement.

Furthermore, in Morrison Steamship Co. Ltd. v Greystoke Castle [1947] [3] the Court made a further exception for cargo owners who were deemed entitled to bring a direct claim on a wrongdoing ship for the amount of their contribution to general average expenditure, as damage flowing from the collision. On the basis of these cases it is arguable that Shell could have recovered its economic loss by framing it as damage flowing from the explosion.

However, Leigh & Sillivan Ltd. v Aliakmon Shipping Co. Ltd (The Aliakmon) [4] complicated the matter further when Lord Brandon held that a person “…must have had either the legal ownership of or a possessory title to the property concerned at the time when the loss or damage occurred” [5] . It became established law that where a defendant negligently damages land or property causing the claimant to incur economic loss, equitable principles dictate that the claimant will have a cause of action against the defendant if the loss is consequential upon the defendant’s interference with either his legal or possessory title to that property.

This aspect of the case turned on whether Shell could be said to have either legal or possessory title when the damaged pipes and storage equipment were being held by UKOP and WLPS under a bare trust. Steel J sitting in the Commercial Court in the Queen’s Bench Division held that Shell could not be said to have title to the property as the legal title was held by the trustee companies. Steel J did concede that the loss had been a foreseeable consequence of physical injury to the property; however this was not sufficient for Shell to be awarded damages. Shell merely had contractual rights as opposed to legal or possessory title and this was not sufficient to make out a claim for economic loss.

In the appeal Shell relied on a number of creative arguments to get around the exclusionary rule referred to above. Amongst these arguments the point was made that whatever the law of negligence may be, Shell had alternative claims in nuisance and under Rylands v Fletcher which cover the same ground; beneficial ownership of land has always been sufficient to sustain a claim in nuisance, of which Rylands v Fletcher is a part.

The most persuasive submissions were that firstly, although Shell did not have a possessory title to the damaged property it did have shared equitable ownership of it which was sufficient to give Shell title for the purpose of recovering economic loss [6] . This was termed the “equitable ownership” argument and it was based on the premise that, although legal title was vested in the bare trustees, all of the property rights arising under this title were practiced jointly by Shell and the other beneficiaries.

Mr Laurence Rabinowitz QC, acting for Shell, accepted that the dicta of Lord Brandon in The Aliakmon [7] was clear in confining the right to sue for negligent loss of or damage to property to a person with either legal ownership or possessory title to the property. However he submitted that this was not meant to rule out the owner in equity if that equitable owner had joined the legal owner to the proceedings and Shell had done this.

Secondly, Shell submitted that the rule which required legal or possessory title to assert claim over economic loss “has always been subject to exceptions” and this case should amount to an exception from the usual exclusionary rule derived from Morrison Steamship Co. Ltd. v Greystoke Castle and The Aliakmon [8] . As explained above this was an argument which had been advanced at first instance and had been rejected by Steel J on the basis that it was not consistent with the relevant authorities.

In its appeal Shell went even further and argued that the exclusionary rule should be abandoned altogether although it recognized that this was not an option available to the Court of Appeal, being bound by previous precedent. Nevertheless Shell argued that in the name of “justice” a further exception from the exclusionary rule should be made in these circumstances.

This emphasis on justice became known as the “merits argument” and placed emphasis on the special relationship between the trustee and a beneficiary. It was submitted that this relationship should undermine the force of the floodgates argument relied upon to justify the restriction on allowing recovery for pure economic loss.

Steel J’s decision was successfully appealed to the Court of Appeal in 2010; the Court’s reasoning in the case will be set out and evaluated below.

Analysis of the Court of Appeal’s Decision

In relation to the first argument advanced by Shell, the Court of Appeal was swayed by Counsel’s submissions and held that Shell was the “real” owner of the damaged property. In coming to this decision the Court of Appeal applied what was described by Nicholas Macklam [9] as a “functional analysis”. The reasoning being that the damaged property was held by UKOP and WLPS as bare trustees but all of the property rights arising under this title were being exercised by Shell for example, using the pipes and storage facilities to supply fuel.

It is clear why the Court reached this decision as Shell was in reality acting as the owner of the property. However the way in which the Court framed its decision on this point has distorted the traditional rules of equity and sparked much academic criticism. Macklam states that the judgment was flawed in that it lacked a “conceptual” analysis of the rights of a beneficiary under a trust [10] .

In support of this point Macklam draws attention to the essence of a beneficiary’s rights which is a right against the trustee in relation to how the trustee exercises the rights vested in them as trustee. If this principle still stands then regardless of the circumstances UKOP and WLPS always held legal title to the damaged property and Shell never actually owned anything at all. If Shell did not own the property then T cannot be said to have breached any common law duty against Shell and the situation should not attract the protection of the equitable principles on which Shell sought to rely. The example given by Macklam is that of a third party trespassing on land of which the title is held on trust; in this situation it is clearly the trustee who is able to bring a claim, not the beneficiary.

In response to Macklam’s argument it can be said that the Court did acknowledge this point in that it held that Shell could recover its provable loss subject to the proviso that the legal owner be joined. By doing this the Court was then able to reconcile the conflict referred to above. However, Rushworth and Scott [11] suggest that this proviso was necessary to insulate Total from the risk of double liability rather than any concern that the legal owner’s claim would be different from that of the beneficiary’s.

The Court’s reasoning begs the question whether the Court was influenced by Shell’s motivations in creating the problematic relationship of trustee and beneficiary over the damaged property. It seems more than probable that the relationship arose out of statutory obligations imposed on Shell under the Law of Property Act 1925 [12] .

The Act provides that “where land is expressed to be conveyed…the conveyance shall operate as if the land had been expressed to be conveyed to the grantees, or, if there are more than four grantees, to the four first named in the conveyance, as joint tenants”. This meant that Shell was restricted from having legal title over the property at all as there were more than four co-owners involved in the deal. Whilst not explicitly referred to in the judgment it appears likely that the Court would have had more sympathy with Shell in light of this statutory restriction.

In relation to Shell’s second argument that the case fell within an exception to the exclusionary rule found in Morrison Steamship [13] , the Court held that in the interests of “practical justice” it should not be legally relevant that the co-owners decided to vest the legal title to the pipelines in their service companies and enjoy the beneficial ownership rather than the formal legal title. The Court held that the rationale for the exclusionary rule was not engaged and as a result a duty arose in Shell’s favour in respect of those losses which were foreseeable and provable.

The rationale for the exclusionary rule was said to be the age-old “floodgates” argument and the Court pointed to the illustrative commentary by the editors of Clerk and Lindsell in that “to allow all claims for such economic loss would lead to unacceptable indeterminacy because of the ripple effects caused by contracts and expectations”. Foster also highlights the force of the age-old yet still relevant argument articulated by Cardozo CJ in the US case of Ultramarines Corporation v Touche (1931) [14] that the judiciary need to avoid opening the floodgates to “an indeterminate liability to an indeterminate class for an indeterminate time”.

However, somewhat surprisingly, the Court held that, due to the ample proximity between Shell as the beneficial owner and the Trustee this did not fall within the circumstances the exclusionary rule was in place to prevent. It is difficult to agree that this case did not warrant the Court giving greater heed to policy considerations like the floodgates argument in light of the scale of this industrial disaster.

The final report on the Buncefield incident placed the economic impact of the explosion in the region of £1 billion comprising compensation for loss, costs to the aviation sector, the emergency response and the costs of the investigations. Although other policy arguments such as the undesirability of interfering with legitimate commercial competition would have added weight to this submission.

More importantly the Court of Appeal failed to cite any authority in support of the duty which was held to have arisen despite there being a plethora of common law cases demonstrating that it would be “heretical” to think that an equitable assignee of goods could bring a cause of action against the Defendant. In Joseph v Lyons, the Court of Appeal itself had considered this to be “trite law” yet surprisingly it was not even mentioned in the dicta of this judgment [15] .

The orthodox viewpoint advocated by Rushmore and Scott [16] is illustrated by the judgment in MCC Proceeds Inc. v Lehman Brothers International [1998] [17] where the Court of Appeal then decided that a beneficiary under a bare trust could not rely on its equitable interest to claim against disponees of the trust property in conversion. Furthermore in Hunter v Canary Wharf Ltd. [1997] [18] the House of Lords held that the Claimant had to have a right to exclusive or de facto exclusive possession to bring a cause of action in nuisance. This reasoning is typical of the traditionally accepted approach to these types of cases and it is clear that the Courts were trying to preserve a distinction between cases involving legal and equitable rights.

The Court’s unwillingness, not just to adhere to, but to mention case law in this area is an unsatisfactory way of coming to a decision which most academics have concurred was to be welcomed [19] . The Court of Appeal had an opportunity to provide clarity; if its decision was to be made on the basis of policy considerations then it arguable that this should have been done so in a transparent manner rather than omitting to mention previous precedent and adapting equitable principles to fit the facts of the case in front of the Court.

In providing this judgment the Court of Appeal has created a number of problems which are likely to come to fruition in the future. Firstly, the fact that the Court used terminology implying Shell was the “real owner” under a bare trust means that the exclusionary rule is now in doubt and it is difficult to predict how disputes will now be resolved. Secondly, Dunn and Foster [20] have suggested that the Court’s failure to draw a distinction between a direct claim and a derivative claim has caused this area to become unduly complicated.

One authority that could potentially be relied on to demonstrate that the Court was not complicating the issue further and was in fact acting in accordance with previous case law is White v Jones [21] . In this case, Lord Goff held that despite there being no contract or fiduciary relationship between the parties, the Claimant’s could still bring a claim against the Defendant (a Solicitor) for pure economic loss as there was evidence of a special relationship between the parties and the Defendant had assumed a responsibility towards the Claimants. In the absence of any agreement or orthodox fiduciary relationship it is arguable that the House of Lords were taking a similar approach to that taken by the Court of Appeal in this case. However Rushworth and Scott submit that this decision was based on the fact that the assumption of responsibility was “at core consensual” [22] . They argue that this reasoning does not lend itself to a case involving negligent damage to property, which has arisen out of breach of duties outside of any consensual undertaking.

Yet it must be borne in mind that this is an extremely convoluted area of law straddling issues of both equity and law. In discussing the first instance trial, Neil Foster appropriately stated, “this claim lay in the heartland of an area with which the law of negligence has been struggling for years” [23] . This argument is particularly persuasive as Total’s case was an exceptional one gaining massive media exposure and described by the Sunday Times as “Britain’s biggest peacetime explosion” [24] . For this reason it perhaps deserved exceptional treatment by the Courts. In any event the decision has been heralded as a “triumph of form over substance” and it has afforded justice to Claimants affected by what was described as an “ultra-hazardous operation conducted by Total” [25] .

Conclusion

The mass of litigation arising out of the Buncefield disaster is not yet concluded but lessons clearly have been learnt from Total’s mistakes. The investigations into the disaster have led to calls for an effective regime for the control and mitigation of major accident hazards under the Control of Major Accidents Regulations [26] which is more consistent to that which was in place during the 2005 incident at Buncefield.

Following the Court of Appeal’s decision, Total has been granted leave to appeal it and litigants and academics alike will be waiting with bated breath to discover whether the Supreme Court will favour form or substance. Rushworth and Scott suggest that the most appropriate course for the Court to take would be to reject any direct claim by Shell but leave for determination the possibility of a derivative claim that could be successful through amending the pleadings in line with GUS Property Management v Littlewoods Mail Order Stores Ltd [27] .

Whatever the decision by the Supreme Court one would hope that the judgment will satisfy Macklam’s demand for “linguistic precision” [28] and bring some much needed clarity to this area.

Judge: Waller, L.J. (V-P); Longmore, L.J.; Richards, L.J.

Word Count: 3,251

References (Harvard)

Articles

Adam Rushworth, Andrew Scott, “Total Chaos?” Shell v Total [2010] L.M.C.L.Q. 536

Neil Foster, Case Comment, “Civil liability arising from the Buncefield explosion” Env. L. Rev. 2010, 12(1), 57-70

Nicholas Macklam, “Colour Quest Limited v Total Downstream UK Plc: the nature of a beneficiary’s interest under a trust” Conv. 2010, 3, 265-270

Cases

GUS Property Management v Littlewoods Mail Order Stores Ltd (1982) S.C. H.L. 157

Hedley Byrne v Heller [1964] A.C. 465

Hunter v Canary Wharf [1997] AC 655

Leigh & Sillivan Ltd v Aliakmon Shipping Co. Ltd. (The Aliakmon) [1986] 2 W.L.R. 902

MCC Proceeds Inc. v Lehman Brothers International [1998] 4 All ER 675

Morrison Steamship Co. Ltd. v Greystoke Castle [1947] AC 265

Rylands v Fletcher (1866) L.R. 1 Exch. 265

Shell v Total [2010] EWCA Civ 180 at 117

White v Jones [1995] 2 AC 207, 268