Thames Water Utilities Ltd v Heathrow Airport Ltd & Anor

This appeal from the decision of Blair J -- [2009] EWHC 407 Comm -- raises a short question of construction on an agreement made between Heathrow Airport Limited (“Heathrow”) and Thames Water Utilities Limited (“Thames Water”) during the lead up to the construction of Terminal 5 at Heathrow Airport.

Thames Water owned a site at Perry Oaks (“the old site”) which was used to treat sewage sludge in a series of large lagoons. They agreed to sell that site to Heathrow but needed to remove the sludge from the site and construct new sewage treatment facilities. These new facilities were more state of the art than those at the original site and did not use lagoons to the same extent as before.

Heathrow agreed to pay three million pounds for the old site as well as the cost of building the new sludge treatment plant at Iver South together with the cost of constructing the new facilities at a place called Mogden by way of a replacement of the operations at the old site (as it was called in the agreement and the scheme). Heathrow also agreed to pay the additional costs of operating the works comprised in the scheme for a period of twenty years from a defined handover date and half of such additional costs for a period of ten years thereafter, over and above those which would have been incurred by Thames Water if they had continued to operate the old Perry Oaks site. It is the method of calculating these costs which has given rise to the present dispute.

The parties set out the effect of the agreement in principle in clause 7.3.2 of the agreement and made it subject to the following provision:

“[Heathrow] and [Thames Water] shall use all reasonable endeavours to reach agreement […] as to the bases upon which:-

(a)

the sewage treatment works for the Site would have been operated as from 1989 until 2040 on the assumption that this Agreement and the Interim Arrangement had not been entered into and on the further assumption (if not actually the case) that the Works had not been authorised by the planning authority or the Secretary of State and

(b)

on a calendar year basis the works comprised in the scheme would be operated, maintained and replaced to the standard applicable thereto […] until 2040

in order to calculate the amount of such additional costs to be paid by [Heathrow] under the provisions of this Clause 7.3.2”

There was then a provision that, if agreement as to the bases for a) and b) cannot be reached, the matter is to be referred to an independent expert with appropriate knowledge and experience a) of the sewage disposal industry in general; b) of a process which is the same or similar to that adopted by the scheme; and c) of a process which is the same or similar to that currently adopted at the old site.

The parties have not been able to reach agreement on the scope of what is to be decided by the expert when he is appointed. That appointment has, as far as I am aware, not yet occurred. The dispute centres round the word “bases” insofar as it relates to the basis upon which the sewage treatment works for the old site would have operated. Thames Water contend that the expert is to make a single determination of the basis on which the sewage treatment works (the old Perry Oaks site) would have been operated if they had continued to exist) and that that basis should include or reflect not merely matters of raw principle, whatever they may be, but also the hypothetical mode of operation of the works for the relevant thirty-year period.

Heathrow contends that the basis determined by the expert should include or reflect merely matters of broad principle but not the mode of operation, which is to be left open for subsequent review and determination as the years go by in order that unknown future events, such as change in legislation or regulation, can be taken into account among other things.

In those circumstances the parties agreed to formulate an issue for the judge to decide, which was framed in the following terms:

“It being common ground that the matter to be determined by the expert appointed pursuant to Clause 7.3.2.1 of the Agreement is the bases set out in sub-paragraphs (a) and (b) of Clause 7.3.2.1 and that the expert is to make a final, once and for all, determination:

(1)

whether the said bases include hypothetical mode of operation in the sewage treatment works for the Perry Oaks site as from 1989 until 2040 on the assumptions set out in sub-paragraph (a) of Clause 7.3.2.1 -- as the Claimants contend; or

(2)

whether the expert should not determine the hypothetical costs of operation at the Site, and whether his determination may provide for the detailed manner or mode of operation of the Site (in accordance with the bases of operation he determines) to be agreed or determined on an annual or other periodic basis to take account of future events, such as changes in regulation or legislation -- as the Defendants contend.”

The issue is formulated in this way because Heathrow are concerned that the comparative costs exercise should compare like with like. If legislation or regulation, for example, increases the costs of operating the current scheme at Iver South and Mogden, it would also have increased the costs of operating the Perry Oaks site. Since that increase will be automatically counted into the calculation of the current costs of the new site, it ought also be counted into the hypothetical cost of operating the old site. Whether this concern is most conveniently and appropriately reflected by an issue which requires the court to decide whether or not the basis on which the sewage treatment work of the old site would have been operated is to include the mode or operation of the site is perhaps open to question. That was a matter which also slightly concerned Toulson LJ when he gave permission to appeal, but of course the issue is the issue and it is that issue which both Blair J and this court has to determine.

Blair J decided that the distinction sought to be drawn by Heathrow between a hypothetical basis of operation and a hypothetical mode of operation was in practice an illusory one, and that the parties cannot have intended that the expert should be prevented from considering the mode of operating the works at the site when dealing with the basis on which the works would have been notionally operated. That must especially be so if the end result of the enquiry is to have a comparison of the costs at one site as compared with the other.

For my part, in this case I find it difficult to say much more than that I agree with the judge. To expect the experts to disregard the mode in which the works would have been notionally operated, when he is assessing the basis on which the works would have been notionally operated, is to expect him to do, in my view, an inappropriately difficult task. The basis of an operation must include the manner or the mode in which the operation is conducted. Indeed, to leave out the mode in which an operation is notionally conducted is to leave out an important, if not the most important, part of the basis on which it is conducted. The examples which we were given by Mr Wilmot-Smith QC, on behalf of the appellants, in the course of his admirable oral argument, were consistency of sludge and the use of lagoons. He suggested that both those would be appropriately part of the basis of operation, but the mode of achieving that consistency of sludge or the mode in which the lagoons were actually used were apparently part of the mode of operation and would therefore not be a part of what the expert should at this stage consider. Those examples did not inspire much confidence in me because I find it difficult to see how the expert, when performing his task, could usefully, from the point of view of the parties, determine for the future such a thing as consistency of sludge or the use of lagoons without having regard to the actual way in which that consistency was to be achieved or that use was to be made.

Moreover, a declaration that the expert is not to have regard to the mode of operation is almost bound to give rise to detailed and unnecessary dispute. I am not quite clear whether, for example, the number of workers and the number of hours worked would be a matter of raw principle or whether, as would be more likely in my view, they would be matters of the mode of operation. And when one sees in the skeleton argument that one of the matters or principles suggested is the question how Thames Water should be assumed to have responded to changing circumstances -- in other words, whether they would be likely to comply with new legislation or regulation which may be made in the future -- I am left in the position that that sort of question is most unlikely to have been intended to have been decided by a sewage expert, however distinguished he may be.

The second part of the issue setting out Heathrow’s contentions presupposes that the detailed mode of operation of the old site is to be determined on a periodic or even annual basis to take account of future change in the law. Yet it is agreed between the parties that the sewage expert is to make a final, once and for all, determination. Heathrow, therefore, seem to contemplate that disputes about the mode of operation, on the periodic basis suggested, will not be determined by the sewage expert, who is, after all, the relevant expert, but by an expert appointed under the disputes clause (Clause 10 of the agreement) who is apparently to be a solicitor. That again seems to me to be an unlikely intention to impute to the parties. Solicitors are, of course, skilled in resolving legal disputes, but not particularly apt tribunals to decide notional modes of operations of sewage works. This is a consideration to which the judge some weight in paragraphs 32 and 33 of the judgment and I agree with him. There is also considerable force in the consideration advanced by Mr McCaughran in his skeleton that if such further disputes do arise and have to be resolved, as is apparently contemplated by Heathrow’s contentions, the intended finality of the sewage expert’s opinion will be undermined.

Those basically are the reasons why it seems to me the judge here came to the correct conclusion. Mr Wilmot-Smith made four particular attacks on the judgment. He submitted first that, if the mode of operation is to be included in what the expert is to be asked to assess, that will be a nearly impossible exercise. One does, of course, accept that it will not be a particularly easy exercise, but it does seem to me that is precisely what the parties expected this contemplated sewage expert to do, and I would consider that that is the kind of thing that a skilled sewage expert should be able to do, however problematic it may be to do it for such a long period in the future.

Secondly, Mr Wilmot Smith submitted that Thames Water’s construction will lead to a windfall because of its unpredictability, and he says that if an expert predicts a mode of operation over a thirty-year period he is bound to get something wrong. That will mean that a windfall occurs to one party or the other. But the whole exercise is an exercise of prediction. The parties must have been aware of that when they agreed that they would ask the expert to perform this exercise, and the fact that inevitably some parts of that prediction may turn out to be wrong does not seem to me to be an argument for construing the contract in the way Heathrow is asking us to construe it.

Mr Wilmot Smith submits, thirdly, that his construction would avoid the absurdity of predicting the mode of operation of the scheme as it is at Iver South and Mogden. No doubt if the second answer to the preliminary issue is given, as Heathrow would wish us to give, that answer would relate only to the notional basis of operation of the old site; but the fact is that 7.3.2.1(b) does involve determining the basis on which the works comprised in the scheme will be “operated, maintained and replaced” in any event; although, since it will be an actual calculation, it can be done on a yearly basis. That yearly basis is in fact made clear in sub-clause b, a provision which is notably absent from sub-clause a.

Fourthly, Mr Wilmot Smith was concerned to dispel any notion that Heathrow were willing to undertake an adverse commitment in relation to to these works because they wanted the scheme of Terminal 5 to go ahead as rapidly as possible. Insofar as anyone had that notion, Mr Wilmot Smith has succeeded in dispelling it, but it is not a notion which I, for my part, would ascribe to the judge in his judgment.

The only possible criticism of this judgment, to my mind -- excellent judgment as it otherwise is -- is the fact that Blair J did give some modest approval to the concept that the monetary figure of three million pounds might be a nominal consideration. To my mind, it would be difficult to say that a figure of three million pounds is truly nominal. Of course, it was only a part, and perhaps even the only uncontroversial part of the consideration in this case; but I, for my part, would not describe it as nominal consideration. However that may be, it seems to me that this appeal fails and must be dismissed.

I agree.

I also agree.