A recent Court of Appeal decision has addressed the question of liability for economic loss where the claimant is the beneficial owner of property damaged or destroyed due to negligence.
A summary of the Court of Appeal judgment and its implications is set out below. To read the full judgment, please click here
The case arose in respect of a series of fires and explosions occurring on 11th December 2005 at the Buncefield Oil Terminal. This incident was well documented in the media and a substantial number of claims for compensation were brought by numerous claimants against Total Downstream UK PLC, Total UK Limited ("Total") and Hertfordshire Oil Storage Limited, a company jointly owned by Total and Chevron Limited ("Chevron").
The disaster was caused by the negligent overfilling of a fuel storage tank located at one of the three sites that comprosed the Oil Terminal. This lead to the creation of a large hydrocarbon rich vapour cloud which ignited causing widespread damage to property in and around the Oil Terminal.
This particular case related to significant damage caused to tanks and pipelines through which Shell UK Limited ("Shell") distributed its oil. The legal title to the tanks and pipelines was vested in "vehicle" companies, which had been set up to hold the property on trust for Shell and others. The vehicle companies were non-trading companies and had no employees, made no profits and did not declare dividends or hold assets on their balance sheets (other than £200 of issued share capital). Shell was, with others, the holder of a beneficial ownership interest in the tanks and pipelines at the time of the incident whilst also being one of the shareholders of the aforementioned vehicle companies along with, BP, Total and Chevron. Shell also owned oil flowing through the property.
Whilst Total accepted liability for the damage and destruction of Shell-owned property (i.e. the oil) due to its negligence, it disputed that it should be liable for any loss of profit flowing from the destruction or damage to the tanks and pipelines which were legally owned by the vehicle companies. In doing this, it relied upon what it described as "the rule recognised by many authorities" that only a legal owner or someone with an immediate right to possession of property has the right to claim damages for economic loss which is the consequence of damage to such property. Shell's actual loss following the incident arose through its inability to supply aviation fuel and ground fuel to customers. Shell had been unable to overcome this "rule" at first instance and so sought to appeal the previous decision.
In the absence of any directly applicable authority, the appeal court decided to look more closely at the "exclusionary rule" and its rationale. The rule, according to the main textbook, states that: "no duty is owed by a defendant who negligently damages property belonging to a third party, to a claimant who suffers loss because of a dependence upon that property or its owner."
Counsel for Total submitted that Total owed no duty to Shell because Shell's losses were the result of its dependence on the property via a contractual right to have its fuel loaded, carried and discharged from the pipelines.
In response, the judges said that they considered it legalistic to deny Shell a right to recovery by reference to the "exclusionary rule." Shell was a part beneficial owner and it could not be said that Shell was a complete stranger. They went on to describe the origins of the "exclusionary rule" as being a "floodgates argument" - - the courts had feared that to allow such claims from persons with mere contractual interests could result in the courts having to address situations beyond the "proximate and direct consequence of wrongful acts." In the present case however, Shell's beneficial ownership of the damaged property went far beyond that of a contractual or non-contractual dependence on the damaged property and therefore constituted a special relationship even closer in many ways than that of a bare trustee (in this case, the company vehicle) holding no more than legal title.
Judgment
After analysis of further authorities, the appeal court reversed the first instance decision holding that:
- a duty of care is owed to a beneficial owner of property (just as much as to a legal owner of property) by a defendant who could reasonably foresee that his negligent actions would damage that property;
- if, in breach of duty, property is damaged by the defendant, that defendant will be liable not merely for the physical loss of that property, but also for the foreseeable consequences of that loss such as the extra expenditure or loss of profit the beneficial owner incurs; and
- provided that the beneficial owner can join the legal owner in proceedings, it does not matter that the beneficial owner is not himself in possession of the property at the time of the incident.
We understand that application for leave to appeal to the Supreme Court is pending.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 12/05/2010.
