2017 Harvest

2017 Harvest

Wednesday, July 16, 2014

BC Supreme Court rules on dispute between municipality and pipeline company over upgrade costs

The City of Surrey planned to expand the Fraser Highway.  The expansion would necessitate the upgrade of a pipeline owned and operated by FortisBC Energy Inc. (formerly Terasen), and Fortis commenced an action against Surrey in respect of the allocation of cost for the upgrade.  Fortis claimed that it had been assigned rights originally held by the British Columbia Electric Company under a Trunk Line Agreement from 1956.  Under that agreement, Fortas argued, the costs of the pipeline upgrade work were to be allocated by agreement between the parties or, failing agreement, were to be determined by arbitration.

In the alternative, Fortis sought a declaration that the highway project constituted a de facto expropriation of its statutory right-of-way along with directions that would require Surrey to proceed with the expropriation in accordance with applicable legislation.   Finally, in the further alternative, Fortis claimed compensation for the costs it had incurred already to protect its pipeline and to accommodate Surrey's highway project on the basis of quantum meruit or unjust enrichment.

Surrey disputed the validity and the application of the Trunk Line Agreement, saying that it had been superseded by legislation that requires Fortis to pay the full cost of the upgrade work.  In any event, Surrey alleged that Fortis had fundamentally breached and repudiated the Agreement.  Surrey counterclaimed against Fortis including claims for negligence, nuisance, negligent misrepresentation, breach of fiduciary duty and breach of contract.

In reviewing the Trunk Line Agreement, the BC Supreme Court found that provincial pipeline legislation enacted in 1955 was not intended to prohibit, supersede or override agreements such as the Trunk Line Agreement.  The Court then reviewed regulations made pursuant to the legislation and again found that the Agreement was neither superseded nor rendered illegal by the regulations.  However, the Court found that Fortis had repudiated the Agreement by refusing to consent to the dedication of the statutory right-of-way lands at the highway "unless Surrey either agreed to create a fee simple lot over the portion of the highway crossing the Pipeline, were paid all of the cost of the Pipeline upgrade work".  This deprived Surrey of substantially the whole of the commercial benefit of the Trunk Line Agreement and constituted a breach which went to the root of that contract.  The Court found that Fortis repudiated the Agreement, that Surrey accepted the repudiation, and that the agreement was terminated and ceased to bind the parties.

In the absence of the Agreement, the allocation of costs was determined by the Pipeline Regulation.  The Regulation provided that costs must be shared equally by a municipality and a pipeline company where a new highway is built within a municipality by the municipality on an existing right-of-way or on a newly dedicated right-of-way.  The Court found that the application of the Regulation to the pipeline upgrade work did not constitute a de facto expropriation because it would not "constitute a taking of virtually all of the rights of Terasen Gas with respect to the SRW or Pipeline".

Read the decision at: FortisBC Energy Inc. v. Surrey (City).