In its decision in R (on the application of National Grid Gas plc) v Environment Agency (delivered on 27 June, 2007) the House of Lords has considered a number of important issues as regards present-day corporate responsibilities for acts of statutory predecessor businesses in respect of liabilities for historic land contamination.

The decision will be welcomed by many privatised utilities, but must still be treated with some caution. Its applicability in other contexts of land contamination by historic entities which have subsequently been nationalised and then privatised, and more generally in terms of successor liability, will need to be considered with care. In particular the case recognises that the language of other statutory transfers/transfer schemes does potentially create successor liability for contaminated land. The implications of the case are discussed further below.

The Legal Background

It has been clear since the enactment of the contaminated land provisions of Part IIA of the Environmental Protection Act 1990 that those who have caused or knowingly permitted contamination of land, and those who own land, may bear present remediation liabilities notwithstanding that polluting actions occurred prior to the enactment of Part IIA. But in the context where those companies may have been first nationalised and then privatised to what extent should present-day companies be regarded as heir to the liabilities of their predecessors?

At first instance, Forbes J held that National Grid Gas plc was responsible for the contaminating activities of predecessor gas companies, and so was an 'appropriate person', and treated as the polluter, for service of a remediation notice by the Environment Agency.

In its judgment of 27 June 2007 the House of Lords has overturned the decision of Forbes J, and has rejected the approach taken by the Environment Agency.

The Essential Facts

The proceedings arose out of land contamination discovered around a number of privately owned residential houses at Bawtry, near Doncaster. The houses had been built around 1966 on land upon which earlier a gas works had stood.

The evidence was that from the 19th century until 1912 the land was owned by Bawtry Gas Company, between 1912 and 1931 by the Bawtry and District Gas Company, from 1931 until 1948 by South Yorkshire and Derbyshire Gas Company, and by East Midlands Gas Board from gas nationalisation under the Gas Act 1948 until sale to a residential developer in 1965. Production of gas ceased at the site at some time prior to 1952. By the Gas Act 1972 the various Area Gas Boards were amalagamated into the British Gas Corporation (BGC). BGC was privatised by the Gas Act 1986, establishing British Gas plc (which subsequently became known as Transco plc, and later still National Grid Gas plc).

In these proceedings National Grid Gas plc challenged a decision by the Environment Agency that it bore ongoing corporate responsibilities for the contamination caused pre-1952 by activities of the several companies then operating gas works on the site. National Grid in fact had never owned the assets and had itself never produced coal gas.

The Main Issues

Part IIA of the Environmental Protection Act 1990 imposes primary liability on the parties which caused or knowingly permitted the contaminating substances to be present on land. At first sight this would seem to impose primary responsibility on the predecessor companies referred to above. However, those companies no longer exist, and the issue for resolution was whether the particular statutory processes under consideration by which the assets and liabilities of those companies were transferred initially to BGC and later to British Gas plc and National Grid Gas plc were such as to render the present privatised entity responsible for the retrospectively imposed historical liabilities of the predecessor companies.

Forbes J at first instance

Forbes J found against the applicant, taking the view that National Grid Gas plc did indeed have the cleanup responsibilities in question. In his view it was appropriate either (i) to regard National Grid Gas plc as in law the same 'person' as the earlier polluting companies, so that National Grid Gas plc should itself be regarded as a 'causer' of the contamination, or alternatively (ii) to regard the statutory transfers by reference to which National Grid Gas plc acquired the assets and liabilities of those former companies, as transferring to National Grid Gas plc the liabilities imposed subsequently, but retrospectively, by Part IIA of the 1990 Act.

The House of Lords Decision

Their Lordships were unanimous in allowing National Grid Gas plc's appeal. Although the leading speeches were delivered by Lords Scott and Neuberger, the concurring speech of Lord Hoffmann encapsulated the reasoning of their Lordships in remarkably few words. Lord Hoffmann explained:

"The Environment Agency puts its case in two ways. First, it says that National Grid Gas plc … is [itself] an appropriate person against whom a remediation notice may be served … But National Grid did not cause or knowingly permit any substances to be in, on or under the land. That was done by the East Midlands Gas Board or its predecessor gas undertakers many years before National Grid came into existence. There is nothing in the Act to say that an appropriate person shall be deemed to include some other person or which defines who that other person should be. National Grid is plainly not an appropriate person within the meaning of the Act...

The other argument [of the Environment Agency] is that … there was a statutory transfer of the assets and liabilities of the privately owned predecessor undertakings … In each case the statutory provisions for succession said that the successor company would take over the liabilities of the predecessor company "immediately before" the transfer date. The Environment Agency submits that the liability of the East Midlands Gas Board and its predecessors to have a remediation order made against them … was a liability passed down the chain to National Grid. But I find it quite impossible to say that this was a liability which existed, even as a contingency, "immediately before" the transfers of 1948, 1972 or 1986. No such liability existed until Part IIA was inserted into the 1990 Act by the Environment Act 1995. It is true that the legislation was retrospective in the sense that it created a potential present liability for acts done in the past. But that is not the same as creating a deemed past liability for those acts. There is nothing in the Act to create retrospectivity in this sense."

The Outcome

The House of Lords has quashed the decision of the Environment Agency that National Grid Gas plc should be regarded as an 'appropriate person' to bear a share of the costs of remediation of the sites in question.

That remediation has in fact already been undertaken by the Environment Agency, at a cost of some £66,000 per home (£695,000 in total) – funds provided by DEFRA as grant in aid under the Supplementary Credit Scheme.

Given that the actual polluting companies have all now long been dissolved, and that National Grid Gas plc is not to be regarded as having succeeded to their liabilities, the consequence is that no such actual polluter – "Class A" liable party - presently exists.

On that basis, the Environment Agency could potentially look to present owners and occupiers – "Class B" liable parties – for reimbursement of its expenses. However, the Agency is required by statutory guidance to consider what hardship such cost recovery might cause such persons.

In the circumstances the Agency decided and announced prior to the first instance proceedings that in the event that National Grid Gas plc challenge were successful it would not seek reimbursement of its remediation expenses from present home owners.

The remediation costs will remain therefore a cost to the general public purse.

Applicability of this Decision to Other Contexts

It is well-known that a good many of the industries which were nationalised in the mid 20th century and later privatised were industries with much land contamination potential. The 'big question' following this decision of the House of Lords is how far other privatised entities may take comfort in this decision.

It is now absolutely clear that statutory transfers of this particular type do not transfer liabilities which did not exist, actual or contingent, at the date of transfer. For utilities privatised under this type of statutory transfer before Part IIA was enacted, this is welcome news. There may, however, still be issues for consideration in relation to any contaminated assets held by such statutory transferees after this time.

The position under other transfer schemes (as well as private law liability transfer provisions) also bears consideration after this decision. It is clear that any successor liability will turn on the explicit wording of the liability transfer provisions and back-up mechanisms, which can expressly rule out or rule in a wider net of liabilities if required. These type of situations will need to be evaluated in context, both in relation to the effect of past schemes and in relation to the drafting and effect of future schemes. Their Lordships expressly recognised that more explicit language could achieve successor liability, even for retrospective regimes - the express example being given of the water privatisation transfer scheme arrangements in the Water Act 1989.

In this case the liability fell to the public purse as it was felt inequitable to make the current landowners pay. This of course will not always be the case and owners of contaminated land may not benefit from the hardship exemption and could face liability in circumstances where the original polluter no longer exists. Their Lordships in this case expressly recognised that the 1960's developers of the relevant National Grid land were arguably knowingly permitters and may have been liable if they had not been dissolved.