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.