Dutch Court Landmark Decision On Compensation Of Victims Of Gas-Extraction Induced Earthquakes
By Joris Gazendam, LLM, PhD Researcher University of Groningen
The court ruling is available (Dutch language version only) here.
On 23
January 2018 the Court of Appeal Arnhem-Leeuwarden ruled in a case between
claimants living in the province of Groningen and the Nederlandse Aardolie Maatschappij (hereinafter: NAM). The case
revolved around damages as a result of earthquakes which are caused by the
extraction of natural gas in the province of Groningen. The main legal question
was whether the owners of houses can claim compensation for the devaluation of
their houses even if they do not sell their (whether or not physically damaged)
houses. Normally, the financial loss for the owner of a house
becomes visible on the moment of sale. In this case the owners explicitly
wanted to be compensated even if they would not sell their house. The Court of
Appeal ruled that an owner of a house can only once claim
compensation for damages. Parties are free to decide
on a reference date on which the depreciation is to be determined. On this date
a real estate expert has to establish how much the house has decreased in value
due to the earthquakes. On the reference date the potential future devaluation
of the house, due to future earthquakes, is to be incorporated in the sum of
the damages.
The
extraction of natural gas started in 1963, and since then over 2,000 billion cubic
meters of natural gas has been extracted. It is expected that natural gas
extraction will continue for the coming decades. The extraction of national gas
causes soil subsidence and this in turn induces earthquakes. On 16 August 2012,
the largest earthquake to date occurred with a force of 3.6 on the scale of
Richter near Huizinge. As a result of this earthquake the level of gas
production was reduced by the government, but public perception also turned against
gas extraction.
There have
been arrangements to compensate citizens with damage to their houses, but it
was felt that those arrangements were insufficient. Because of the frequency of
earthquakes and the amount damage incidents (around 10,000 cases each year), it
is thought that the mere fact that a house is located in the earthquake region
will lead to devaluation of the house. The owners of these devaluated houses
wanted compensation for this financial loss, and they therefore started a case
against the NAM in 2014. In 2015, the district court ruled that the NAM was
obliged to pay damages for the devaluation of the houses. The NAM filed an
appeal at the Court of Appeal.
The main
legal question which the Court of Appeal had to answer was whether the owners
of houses can claim compensation for the devaluation of their houses even if
they do not sell their (whether or not physically damaged) houses. The point is
therefore whether and, and under what conditions, the calculation of the damage
due to devaluation of a house (whether or not physically damaged) can be
abstracted from the fact that the house has not been sold, and thus whether the
damage due to devaluation can be calculated in an abstract manner. This case is
an important one as there is no previous case law from the
Dutch Supreme Council (Hoge Raad)
with regard to this specific situation. The case is therefore very informative
for the understanding of Dutch legal doctrine on damage assessment (art. 6:97
Dutch Civil Code).
Before
discussing the substantive question which the Court of Appeal had to answer it
might be useful for the non-Dutch reader to have a short introduction to Dutch doctrine
on damage assessment. Under Dutch law the judge must assesses the
damage in a manner consistent with the nature of the damage
(art. 6:97 Dutch Civil Code). In practice these are two methods for assessing
the damage: the concrete manner and the abstract manner. Under the concrete manner
the amount of damages is determined by the actual costs which the victim had to
make to recover from the damages. A typical example in which the concrete manner
is applied is personal injury. Under the abstract manner, the estimation of
damages is abstracted from the circumstances of the case and the damages is
estimated by looking at objective standards. This is done for example with
personal property damage such as damages to a car. Not the actual bill of
service station is relevant but the amount of money which is generally needed
to repair the car. The concrete manner is the default method, and the abstract manner
is the deviation to the default method.
The Court
of Appeal had to decide whether the abstract manner of damage assessment could
be applied to unsold houses. Because this is a new situation not covered by
previous case law the Court of Appeal first had to analyze whether there have
been similar cases in the past. The Court of Appeal found that this was the
case, as there were previous cases related to damages caused by mining
activities. The Court of Appeal then had to assess whether the application of
abstract assessment would lead to a reasonable and effective result. The Court
of Appeal had to take into account several aspects such as the temporary or
non-temporary character of the damage, the practical objection to the
application of the abstract assessment of the damages, and if it is possible to
determine the damages when a house is not even sold. After a thorough
elaboration on the claims of both parties and the relevant case law, the Court
of Appeal found no objection to the application of the abstract damage
assessment. The next issue which had to be decided was how the method was to be
applied.
The sting
of this case obviously is the question how one should determine the damages as a
result of depreciation of a house which is not yet sold. Normally, the
financial loss for the owner of a house becomes visible on the moment of sale. In
this case the owners explicitly wanted to be compensated even if they would not
sell their house. The damage they suffer from the depreciation is caused by the
effects that this depreciation has on their financial situation. A house is for
a family probably the most important object for security which can be given to
a bank to cover a loan (mortgage). When the house becomes less valuable it
means that families have less access to credit and this is a form of damage.
The key question thus becomes when the amount of damage is to be determined.
The Court of Appeal ruled that parties are free to decide on a reference date
on which the depreciation is to be determined. On this date a real estate
expert has to establish how much the house has decreased in value due to the
earthquakes. The Court of Appeal explicitly ruled that an owner of a house can
only once claim compensation for damages. On the reference date the potential
future devaluation of the house, due to future earthquakes, is to be
incorporated in the sum of the damages.
The
decision of the Court of Appeal contains ample fuel for discussion. Allowing for
an abstract determination of the amount of damage shifts the burden to the real
estate experts. It is obvious that housing prices have dropped in the province
of Groningen, but this could also be caused by the fact that it is a “shrinkage
region” with higher average unemployment and an aging population. Additionally,
the NAM will undoubtedly bring this case before the Dutch Supreme Council. So
we have to wait a few years before we know for certain whether the Court of
Appeal applied the correct interpretation of article 6:97 Dutch Civil Code.
Thus we only have two certainties at this point: we haven’t witnessed the last
earthquake in Groningen and this was certainly not the last thing we will hear
about this matter.
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