AgriLaw: April 2010

Pipeline Losses - Annual Compensation

Agricultural landowners impacted by oil and gas pipelines have a legal right to be compensated for both the land rights required by the company to construct and operate the pipeline and for all damages incurred.  With the proliferation of energy pipelines, landowners increasingly argue that the impacts upon their farm operations and families are not limited simply to pipeline construction but that these impacts continue throughout the operating life of the pipeline and following its abandonment forever.  While landowners are typically compensated at the time of construction for land rights and construction-related damages, some landowners are now pursuing ongoing reviewable annual compensation in an effort to address these continuing losses.  Are such losses compensable?

The Alberta Court of Queen’s Bench recently considered an appeal from a decision of the provincial Surface Rights Board (SRB) determining that annual compensation is appropriate to address such continuing losses.  On appeal, the issue for the appellate court was whether the SRB decision was reasonable.  The court referred to previous Court of Appeal authority which requires that, in determining appropriate compensation, consideration be given to whether or not there exists a “Pattern of Dealings” (PoD) between pipeline operators and landowners for the acquisition of land rights in the vicinity of the proposed pipeline.  In reviewing the SRB’s decision, the appellate court noted:

“A PoD arises ‘where there are such a number of deals established so that it may be said that a pattern has been established by negotiations between the landowners and oil companies in a district’.  Once a PoD has been established, the SRB should only depart from such a compensation with the most cogent reasons … The SRB rejected [the company’s] evidence of a PoD stating that it needed ‘(a) a sufficient number of comparables with identical or at least very similar terms, and (b) assurance that the negotiation process met certain minimum criteria’ …

The SRB also stated that it was persuaded that there would be ongoing and/or recurring compensable losses in these cases and once it had made this determination, it was only reasonable to award annual compensation since only an annual award provides for compensation that is contemporaneous with the events/factors that are attracting the award of compensation.”

In the case under review, the appellate court considered that the agreement entered into by the company with 148 landowners which did not provide for annual compensation constituted a sufficient pattern of dealings to establish appropriate compensation for the remaining 14 landowners.  The court concluded that the decision of the SRB awarding annual compensation was unreasonable because of the failure of the landowners to provide evidence to the SRB or the court of either the power imbalance in the negotiations between landowners and the pipeline company resulting from the company’s expropriation powers, or the nature and cost of ongoing impacts which would be suffered by landowners.

With respect to the negotiation process which resulted in the agreement accepted by the court as establishing a pattern of dealings, the appellate court stated:

“Counsel for the landowners invites the Court to take notice of the fact that there is always such a power imbalance between a large pipeline company and a landowner in these cases … In my view once (the company) proffered evidence of this PoD consisting of 148 agreements entered into as a result of negotiations between (the company) and a coalition of landowners, it was under no obligation to adduce evidence of the circumstances of the negotiations on the comparables in the absence of a suggestion by any of the landowners that the parties did not enjoy equal bargaining power … Without any contrary evidence as to the knowledge of the landowner, the degree of willingness on the part of the landowner or the equality of the bargaining positions between the landowner and Operator, it must be presumed that the parties had equal knowledge of the strengths and weaknesses of their positions, were willing to proceed with negotiations and enjoyed equal bargaining positions …”

Similarly, in rejecting the landowners’ claim for annual compensation for continuing impacts, the court commented:

“The SRB stated that it ‘was provided with very little quantification of the loss of use, adverse effect, noise, nuisance, inconvenience.’  It accepted the Respondent’s argument that ‘many of these factors are intangible and difficult to quantify’.

“The SRB had no evidence before it as to whether any of the Respondents did experience these ‘effects’ and, if so, the value of the losses to the individual landowners.  The figure of $100 was simply grabbed out of the air by the Respondents to represent these ‘intangible and difficult to quantify’ factors and the SRB accepted it.  There was no realistic or evidentiary basis for selecting that number … The award by the SRB did not reflect losses that might actually be suffered by individual Respondents in this case nor did it consider the potential value or damages arising from such losses should they be suffered in the future.”

Annual compensation to address continuing impacts of energy pipelines on farmers and their families may well be appropriate on the basis determined by the SRB that only such an award provides compensation contemporaneous with the ongoing loss.  However, as emphasized by the Alberta appellate court, landowners pursuing annual compensation can expect to be successful in such a claim only if they have developed the evidence to support their claim.   Such evidence must diminish the significance of other agreements which fail to provide for annual compensation by demonstrating the inequality in bargaining position which results from the company’s expropriation powers.  This evidence must also then clearly identify the long term impacts of pipeline operations and eventual abandonment and provide a rational, detailed calculation of the landowners’ financial loss.