Durham County Council v Darlington Borough Council

There are before me two appeals by Durham County Council (“DCC”) against awards made in statutory arbitrations under the Local Government Changes for England (Property Transfer and Transitional Payments) Regulations 1995 (“the Regulations”) arising from disputes between it and Darlington Borough Council (“DBC”) relating to the operation of those Regulations. The first is an appeal against the award dated 6 December 2002 of Mr Malcolm Spence QC (“the Spence arbitration”); the second is an appeal against the award dated 3 February 2003 of Mr Christopher Cochrane QC (“the Cochrane arbitration”). The appeals are brought pursuant to leave granted by Blackburne J under section 69(3) of the Arbitration Act 1996.

The arbitrations resulted from the reorganisation of local government in Darlington carried out pursuant to section 17 of the Local Government Act 1992 and the Durham (Borough of Darlington) (Structural Change) Order 1995 (“the Darlington Order”). Until 1 April 1997 (“the reorganisation date”), there were two principal tiers of local government in Darlington, DBC and DCC. As from that date, DBC became a single tier or unitary authority. Article 3 of the Darlington Order provided that:

“The functions of (Durham) County Council in relation to Darlington shall, subject to the following provisions of this Part and to any other relevant provision, be transferred to (DBC).”

The reorganisation involved the re-allocation of DCC’s assets, rights and liabilities as between it and DBC. That re-allocation was determined by the provisions of the Regulations. It made provision, in regulation 19, for resolution of disputes between relevant local authorities such as those in this case by statutory arbitration, subject to the Arbitration Act 1950, now the Arbitration Act 1996. (See too section 20(3) of the Local Government Act 1992.) The awards subject to these appeals were made in such arbitrations.

So far as land was concerned, broadly speaking land owned by DCC in the area of DBC and required by DBC for the performance of its functions after the reorganisation date was required to be transferred to DBC; land in DBC required by DCC was to be retained by it; and land in the area of DBC that was required by neither authority was to be sold off by DCC and the proceeds distributed between the two authorities in proportion to their respective populations.

In 1993, DCC had acquired a landfill site known as Creebeck. It is in the area of DBC. The cost of dealing with leachate and gas from the site meant that it had a substantial negative value. Not surprisingly, DCC contended that the Regulations required DBC to take the site. It contended that the site was required by DBC for the exercise of its functions. DBC, not surprisingly, demurred. It contended that the land was required by neither authority for the exercise of its functions, and so fell to be dealt with as surplus land. Mr Spence QC upheld DBC’s contentions. The issue before me is whether he was correct in law in so deciding.

Part III of the Regulations contains provisions for the determination of transitional payments to be made by one authority to the other. There was a dispute between DCC and DBC as to the calculation of a sum due from DCC to DBC. Mr Cochrane QC upheld DBC’s case. There is no appeal before me against his award on the principal sum. However, he also awarded DBC interest on the sum in question from 1997, under the provisions of the Regulations and under the Arbitration Act 1996. DCC submit that he had no power to award interest under either the Regulations or the Arbitration Act, or that his award under the latter was wrong in principle and must be set aside.

The facts

The evidence before Mr Spence consisted of an agreed statement of facts, contemporaneous documents and written witness statements.

The section of the agreed statement of facts relating to Creebeck was as follows:

“16.

With effect from 30 October 1978 DCC leased part of Creebeck site under a lease dated 1 May 1979. The lease was initially for 18 months; it was expressed to be for the purpose of tipping waste and it contained provision for re-instatement prior to its termination and for indemnities. Over time the period of the lease and the area of land it covered were extended such that substantially the whole of the present site (10 hectares) was leased by DCC as at June 1984 when tipping ceased.

17.

On 24 November 1978 a waste disposal licence was issued in respect of the site. The licence application stated that the principal organisations delivering to the site would be DCC and DBC. The licence permitted both domestic and building/commercial waste to be deposited, predominately the latter. In due course the licence was extended to substantially the whole of the present site.

18.

Tipping began on 27 November 1978 and ceased on 29 June 1984. The sources of all of the waste deposited are not known for certain. In view of its location DBC accepts that the site is likely to have been the main site used for tipping domestic waste collected from residents in the area of DBC during this period. The parties are in dispute as to the correct inference to be drawn from the evidence as to the amount and source of the balance of the waste deposited.

19.

After tipping ceased, DCC remained in occupation of the land and work was carried out which was intended to ensure that there were no adverse effects from gas or leachate discharges (in particular DCC carried out clay capping works in 1984, 1991, 1994/5 and May 1995 and gas extraction plant and monitoring boreholes were installed) but DCC did not restore the site to the condition required by the lease.

20.

On 16 March 1993 DCC’s Director of Environment recommended that DCC purchase the site “so that the land may be restored” and it was proposed that once restored “the County will have the option to manage the land or sell the land for agricultural purposes”. The report stated that restoration should have been completed in 1984 but had not been because of “gas and groundwater and non-availability of soils”. On 1 November 1993 DCC purchased the freehold of substantially the whole of the present site for £20,000.

21.

At some time prior to 24 June 1994, responsibility for the site within DCC had been transferred to their Land and Property Department.

22.

DCC arranged for the pollution monitoring at the site by DCWMCL. DCC contend that the monitoring was in due course carried out pursuant to the contract dated 3 March 1997.

23.

On 1 April 1997 DCC’s functions in relation to the DBC area were transferred to DBC. Since that date DCC claims to have incurred expenditure of £47,576 for monitoring and £31,695 for maintenance at Creebeck. DBC is seeking clarification of the sums claimed by DCC.

24.

The current position is that there are continuing problems with gas and leachate contamination of the site. DBC have recognised the problems (letter 21 December 1999). A landfill gas odour suppression system has recently been installed.”

Those facts were supplemented by the report of DCC’s Director of Environment referred to in paragraph 20 and an earlier DCC document. The earlier document, dated 9 September 1992, was concerned with the valuation of Creebeck. It emphasised the potential liability of DCC to its lessor under its expired lease, which had required DCC to restore the land. It stated:

“The County Secretary and Solicitor had stated in his memorandum of 23^rd June 1992 that the lessor could seek damages in relation to the rent they could have received were the land to have been restored and handed back as per the original lease(s). Therefore, as we are holding over the lease, I have allowed for a damages claim based on agricultural rates in my valuation.

I have done two valuations in order to compare and contrast the two available options. Firstly, that we comply with the lease terms in restoring the land as soon as possible and hand it back to Bowater plc. This option would mean incurring costs in removing the apparatus which Durham County Council has already installed for gas extraction purposes (assuming land owner held liable for disposal of gas) and may also include being sued for their loss of income since 1984.

The second option would be to purchase the land and restore the land over a period of time, say 10 years, using materials as and when they are available locally and by advertising free tipping for subsoil/topsoil. When sufficient cover to comply with the planning consents has been achieved, then the area can be levelled and re-seeded for use as agriculture. The land can then by managed as such or sold in order to recoup the original purchase monies. The other major cost involved with his second option would be the cost of monitoring the gas extraction and de-watering systems, together with their associated running costs. The gas extraction system is already installed on site and has been for some time. The de-watering and leachate treatment system will have to be installed. (This is due to be done shortly, as the gas extraction system will not operate properly with the water table at its present high level).

…

Conclusion

There is little difference in cost between restoration now (in its most basic/cheapest form) and purchase of the land with restoration taking place “at our leisure”.

It is hoped that soils may become available with the advent of road schemes in the Darlington locality. At present, it certainly does not seem convenient from Waste Disposals point of view, to restore the site. They would prefer to purchase the site; particularly as the gas extraction system is installed and running. Waste Disposal have sufficient funds available for the purchase. I therefore recommend that the purchase of the land proceed.

As the land should have been returned to agricultural, probably grazing only, this has been used as the basis for valuation – approximately £1,000/acre.

We intend to offer £750/acre (Waste Disposal have agreed to this value).”

The Director’s report was as follows:

“The County Council has leased Creebeck Quarry from Bowater plc, for tipping purposes since May 1979. The restoration of the site should have been completed in 1984, but gas and ground water and non-availability of soils have meant that restoration has not been completed.

Bowater plc are now anxious to have the site restored. However, the problems which have hindered the restoration in the past, still remain. To restore the land now would be expensive as soils have to be imported.

Also, landfill gas extraction may still remain the County Council’s responsibility even if the restoration of soils were to be completed in accordance with the lease. The County Council has already installed a landfill gas extraction system on the site.

I therefore propose that the County Council purchase this land so the land may be restored as and when soils become available in the locality, such as soils from proposed road schemes in this area. When the land has been restored the County Council will then have the option to manage the land or sell the land for agricultural purposes.

Purchasing the site may avoid the County Council’s liability for back rent. If this were to be sought by Bowater plc, the amount of back rent could range from £10,000, if based on loss of agricultural income, to over £160,000 if held to be based upon the last rent payable on this site. The estimated purchase price is £20,000 and funding is available in the Waste Disposal Capital Expenditure budget.

I recommend that the County Council by agreement with the parties concerned acquire the land delineated by red verging, 26.9 acres or thereabouts, on the plan laid on the table, on terms to be agreed by the Director of Land and Property.”

It appears from those facts that immediately prior to its acquisition of the freehold of the site DCC had no proprietary interest in it. It had simply retained possession of the site after the expiration of its lease.

The relevant provisions of the Regulations

Paragraphs (5) and (6) of Regulation 5 are as follows:

“(5)

The relinquishing authority and the acquiring authority in relation to a transferred area shall, during the preliminary period, use their best endeavours to make agreements which–

(a)

identify property of the relinquishing authority to which paragraph (6) below applies and any rights or liabilities acquired or incurred by that authority in respect of any such property or the exercise of any functions in or in relation to the transferred area;

(b)

in relation to any property so identified (other than property (“surplus land”) mentioned in sub-paragraph (b)(ii) of that paragraph), specify the acquiring authority for the purposes of paragraph (1) of regulation 8; and

(c)

in relation to any rights or liabilities so identified (other than rights or liabilities in respect of surplus land), specify that authority for those purposes or that authority and the relinquishing authority for the purposes of paragraph (3) of that regulation.

(6)

This paragraph applies to property-

(a)

which is situated in the transferred area or is held for the purposes of, or in connection with, the exercise of functions in or in relation to that area; and

(b)

which either

(i)

is required by the acquiring authority for the purposes of, or in connection with, the exercise of functions in or in relation to that area on and after the reorganisation date; or

(ii)

in the case of property which is land, is neither so required nor required by the relinquishing authority for the purposes of, or in connection with, the exercise of functions, on and after that date, in or in relation to its area.”

For the purposes of the Regulations, “the relinquishing authority” referred to is DCC; DBC is “the acquiring authority”; “the transferred area” is the area of DBC, and “the preliminary period” was the period from 6 May 1996 until 31 March 1997.

It was naturally indisputable that Creebeck was in Darlington. The determinative statutory provision was therefore regulation 5(6)(b)(i), and the issue between the parties whether Creebeck was “required by the acquiring authority for the purposes of, or in connection with, the exercise of functions in or in relation to that area on and after the reorganisation date”. If the site was surplus land within regulation 5(6)(b)(ii), as contended by DBC, it fell to be dealt with under regulation 10:

“10.

-(1) An authority in whom any surplus land is vested on the reorganisation date (“the custodian authority”)-

(a)

shall use its best endeavours to secure that the land is disposed of as soon as is reasonably practicable; and

(b)

shall not, except with the consent of the Secretary of State, dispose of it for a consideration which is less than the best that can reasonably be obtained.

(2)

…

(3)

Where the custodian authority is the relinquishing authority in relation to a transferred area, the authority shall, as soon as is reasonably practicable after a disposal under paragraph (1) above-

(a)

deduct the relevant proportion of any relevant expenditure from the appropriate proportion of the disposal receipt; and

(b)

if the amount found after that deduction is a positive amount, pay that amount to the acquiring authority in relation to the area.

(4)

For the purposes of paragraph (3) above-

(a)

the appropriate proportion is the proportion equal to the proportion which the population of the transferred area bears to the population of the area which, immediately before the reorganisation date, was the area of the relinquishing authority; and

(b)

the population of an area shall be taken to be the number estimated by the Registrar General by reference to the date which, at the reorganisation date, is the latest date in respect of which such an estimate is available.

(5)

Where the whole of a custodian authority’s relevant expenditure is not met by a deduction of such expenditure from the amount of a disposal receipt as mentioned in paragraph (2) or (3) above, that authority may recover an amount equal to the relevant proportion of any relevant expenditure which is not so met from-

(a)

(inapplicable); or

(b)

where the custodian authority is the relinquishing authority in relation to a transferred area, the acquiring authority in relation to that area.

(6)

For the purposes of paragraphs (3) and (5) above, the relevant proportion means such proportion as the authorities concerned may agree, or failing such agreement-

(a)

where those authorities are successor authorities in relation to an abolished authority, the proportion equal to the proportion which the council tax base of the authority from whom an amount is to be recovered for the financial year in which the disposal takes place bears to the aggregate of the council tax bases for that financial year of all the successor authorities; and

(b)

where the authorities concerned are the relinquishing authority and the acquiring authority in relation to a transferred area, the proportion equal to the proportion which the relinquishing authority’s estimate of the council tax base of the transferred area for that financial year bears to that authority’s estimate of the council tax base for that year of the area which, immediately before the reorganisation date, was the area of that authority.

(7)

In this regulation-

‘relevant expenditure’ means a sum equal to the amount by which the total of expenditure properly incurred by the custodian authority in connection with the management or disposal of surplus land exceeds the total of payments (other than the disposal receipt) received by that authority in respect of the land; and

‘surplus land’ means any land identified in an agreement as mentioned in paragraph (2)(d)(i) or, as the case may be, (6)(b)(ii) of regulation 5.”

The Arbitrator’s decision

Before the arbitrator, Mr Straker QC for DCC submitted that Creebeck had been acquired and held by it for the purpose of or in connection with its waste disposal functions, and was required by DBC for the same functions. The site had been occupied by DCC until 1984 for waste disposal; it had to remain in occupation of the site because of the source of pollution that had been created by its use of the site; and its continued occupation of the site remained for the purpose of or in connection with the function of waste disposal. That function had been transferred to DBC, which therefore required the site for the purpose or in connection with it. DBC submitted that the site was not required by it for the performance of any function; it was not required by DCC for any function; and accordingly it was surplus land.

The arbitrator accepted DBC’s submissions. He stated:

“73.

I begin with the comment that my opinion is, and always has been, that the onus of care in respect of landfill sites lies primarily upon the owner (or occupier if there is a long lease). If he allows a waste disposal contractor or waste disposal authority, to dispose of waste upon his land, he should make certain that he is fully protected against future potential liabilities. Otherwise, once the waste disposal has finished, he is likely to have no recourse against anyone.

74.

Durham, in my view magnanimously, acquired the site at Creebeck “so the land may be restored” – see the Director of Environment’s report dated 16^th March 1993. Durham has, in my opinion, been monitoring this site as owner. There has been discussion as to what capacity of ownership. I do not find it necessary to state an answer in that manner. The fact is that Durham is the owner, and also, in my opinion, the law is as I am just about to state it. Durham has not been disposing or keeping or treating waste on this site since about June 1984 – see Agree Fact 18, Appendix 2 – and no further waste management licence was sought or granted save for some further clay capping. Under section 51(1) of the Environmental Protection Act 1990 the duty of each waste disposal authority is to arrange for the disposal of waste by means of arrangements made with waste disposal contractors. Under section 51(4)(d) they have the power to make land available to waste disposal contractors to enable them to treat, keep or dispose of waste. Under section 32(8) it is the duty of a waste disposal authority to secure that a company which it controls does not engage in activities other than the disposal, keeping or treatment of waste or activities incidental or conducive to, or calculated to facilitate, them. However, under section 33(1)(b) it is unlawful to treat, keep or dispose of waste except under or in accordance with a waste management licence. Therefore, since monitoring has continued after the expiry of the waste management licence, it plainly does not constitute treating, keeping or disposal of waste. It may, or may not, have been carried on under section 111 of the Local Government Act 1972 as an ancillary activity, as Mr Straker submits. That matters not, in my opinion. What Durham were doing on the site in the years prior to 1^st April 1997 was not the treating, keeping or disposal of waste.

75.

I repeat that Durham has been monitoring this site as owner of it, and not in pursuance of a duty under section 51. Therefore this function has not been transferred to Darlington. Therefore Darlington does not require the property in connection with the exercise of its functions, and regulation 5(6)(b)(i) does not apply.

76.

Furthermore, Durham does not require the site for the purposes of, or in connection with, the exercise of functions in relation to its area. Therefore regulation 5(6)(b)(ii) does apply, and the site is surplus land. Therefore, by virtue of regulation 5(5), especially the words in brackets in paragraphs (b) and (c) there is no authority to be identified for the purposes of regulation 8.”

(Italics as in original)

Parenthetically, I think that Mr Spence was kind to DCC in ascribing its purchase of Creebeck to magnanimity. It seems to me to have had more to do with its understandable desire to avoid its substantial liability to its lessor for damages for its failure to restore the site and for back rent. However, this is not an appeal on fact, and in any event as will be seen nothing turns on this.

Discussion

The test applied by regulation 5(6)(b)(i) is whether the property is required by the acquiring authority for the purposes of, or in connection with, the exercise of functions in or in relation to its area on and after the reorganisation date. During the preliminary period, it looks forward to the reorganisation date and afterwards. It does not look back. It follows that the purpose for which the property in question was acquired by the relinquishing authority is relevant only in so far as it is evidence of that later requirement.

Regulation 5(6)(b)(i) requires the identification of a function or functions which are or will be exercised on and after the reorganisation date by the acquiring authority, and then poses the question whether the property is required by it for the purpose of or in connection with the exercise of that function or those functions. The words “for the purposes of” require no elaboration. The phrase “in connection with” is of course of wide import: see, for example, Ashville Investments Ltd v Elmer Contractors Ltd [1989] QB 488. On the other hand, “required” imposes a relatively strict test. The arbitrator interpreted “required” as meaning “necessary in the circumstances”, a meaning he derived from the judgment of McCowan LJ in Sharkey v Secretary of State for the Environment (1992) P&CR 332. With respect, I do not think that it is necessary to refer to authority as to the meaning of such an ordinary English word. Nor do I think that the words “in the circumstances” add anything. “Required” is ambiguous. It may have a subjective meaning, akin to “demanded” or “insisted upon”; or its meaning may be objective, when it means, as Mr Spence held, “necessary”. I agree that the test must be objective. Otherwise, the acquiring authority could pick and choose which property it wanted for the exercise of its functions, a result that is unlikely to have been intended. Mr Drabble did not dissent from this interpretation.

Regulation 5(6)(b)(i) requires the identification of a function or functions of the acquiring authority for the purposes of or in connection with which the property is required. The expression “functions”, in relation to local authorities, is of recognised legislative use. Most notoriously, it is to be found in section 111(1) of the Local Government Act 1972:

“(1)

Without prejudice to any powers exercisable apart from this section but subject to the provisions of this Act and any other enactment passed before or after this Act, a local authority shall have power to do any thing (whether or not involving the expenditure, borrowing or lending of money or the acquisition or disposal of any property or rights) which is calculated to facilitate, or is conducive or incidental to, the discharge of any of their functions.”

Mr Straker relied on this provision and on the decision of the House of Lords in Hazell v Hammersmith and Fulham LBC [1992] 2 AC 29 in support of his argument that the “functions” of an acquiring authority should be given a wide interpretation. In Hazell, the House of Lords held that the functions of a local authority “embraces all the duties and powers of a local authority: the sum total of the activities Parliament has entrusted to it. Those activities are its functions.” See Lord Templeman at 29F. It held, as I read Lord Templeman’s speech, that, since borrowing is an activity of a local authority authorised by section 111, it is a function of a local authority.

I am of course bound by Hazell. I have nonetheless to have some difficulty in following the logic of treating something authorised by section 111 because it is “calculated to facilitate, or is conducive or incidental to, the discharge of” a function as itself a function, so that presumably anything “calculated to facilitate, or … conducive or incidental to, the discharge of” that activity is authorised, and in turn becomes a “function”, which as such may extend further the ambit of authorised actions, and so on ad infinitum. To my mind, section 111 distinguishes between “functions” and things “calculated to facilitate, or … conducive or incidental to, the discharge of” a function. This difference of approach to section 111 may be significant where, as in the present case, a statute uses a different form of words to denote something’s relationship with the functions of a local authority. If, for example, the holding of land is calculated to facilitate the functions of a local authority with respect to waste, and assuming for the purposes of argument that its holding of land is not authorised by other legislation, it is permitted by section 111. Its holding of land is therefore a function, and that function cannot be carried out without the land: hence all land falls within regulation 5(6)(b)(i). That is an absurd conclusion, which casts doubt on the correctness of the starting point. The ownership of land cannot be a “function” of a local authority for the purposes of regulation 5(6)(b)(i). Hazell may require borrowing to be treated as a function of a local authority within the meaning of section 111; but I do not think it requires “anything calculated to facilitate, or conducive or incidental to, the discharge of any of their functions”, and in particular the ownership of land of itself, to be treated as a function in the context of the Regulations.

As Mr Drabble QC pointed out, section 111 of the Local Government Act 1972 is concerned with the power of a local authority to do something. That a property was acquired lawfully by a local authority acting within its powers cannot be decisive of the application of regulation 5(6)(b)(i), which is concerned with the requirements of the acquiring authority, and with those requirements at a later date than the acquisition, when the use of the property and the purpose of the ownership of the property may have changed.

In my judgment, regulation 5(6)(b)(i) requires the function for which the acquiring authority is said to require the property to be identified. It is not sufficient simply to refer to “the waste function”. What, therefore, is the function exercised by DBC for which the property was or is required? The analysis of the arbitrator in paragraph 74 of his award cannot be faulted. The only function considered by him was the so-called waste function, but so to refer to it may distort its content. The waste function that is relevant is that which is exercised by the acquiring authority on and after the acquisition date. That function is the subject of section 51 of the Environmental Protection Act 1990, which so far as relevant provides as follows:

“(1)

It shall be the duty of each waste disposal authority to arrange–

(a)

for the disposal of the controlled waste collected in its area by the waste collection authorities; and

(b)

for places to be provided at which persons resident in its area may deposit their household waste and for the disposal of waste so deposited;

in either case by means of arrangements made (in accordance with Part II of Schedule 2 to this Act) with waste disposal contractors, but by no other means.

…

(4)

For the purpose of discharging its duty under subsection (1)(a) above as respects controlled waste collected as mentioned in that paragraph a waste disposal authority—

…

(d)

may make available to waste disposal contractors (and accordingly hold) land for the purpose of enabling them to treat, keep or dispose of such waste in or on the land;

(5)

For the purpose of discharging its duties under subsection (1)(b) above as respects household waste deposited as mentioned in that paragraph a waste disposal authority—

(a)

may arrange for the provision, within or outside its area, by waste disposal contractors of places at which such waste may be treated or kept prior to its removal for treatment or disposal;

(b)

may make available to waste disposal contractors (and accordingly own) plant and equipment for the purpose of enabling them to keep such waste prior to its removal for disposal or to treat such waste in connection with so keeping it or for the purpose of facilitating its transportation; and

…

(c)

may make available to waste disposal contractors (and accordingly hold) land for the purpose of enabling them to treat, keep or dispose of such waste in or on the land.”

None of the activities required or authorised by section 51 could be carried out at Creebeck, since it was full and was not subject to a waste management licence. For example, the land could not be used for the disposal of controlled waste (section 51(1)(a)) or made available to waste disposal contractors for the purpose of enabling them to treat, keep or dispose of waste in or on the land (section 51(4)(d)). Creebeck was not therefore required by DBC for the purpose of or in connection with the exercise of its functions under section 51 on or after the reorganisation date.

Mr Straker suggested that Creebeck cannot be surplus land within the meaning of the Regulations, and therefore the arbitrator’s conclusion must be wrong. He relied on the fact that because of the cost of monitoring and controlling leachates and gas from the site, it has a negative value, and therefore cannot be disposed of for a consideration as required by regulation 10. There are a number of answers to this argument. First, under regulation 10(1)(b) the Secretary of State may consent to disposal without consideration. Secondly, if necessary the custodian authority must put the land into a saleable condition; if its expenditure in doing so exceeds the consideration received on the disposal, an appropriate proportion of the deficit is recoverable from the acquiring authority under regulation 10(5).

Lastly, DCC sought to rely on their and DBC’s functions under section 120(1) of the Local Government Act 1972, and submitted that Creebeck was required by DBC for the exercise of its functions under that provision. Section 120(1) is as follows:

“For the purposes of-

(a)

any of their functions under this or any other enactment, or

(b)

the benefit, improvement or development of their area,

a principal council may acquire by agreement any land, whether situated inside or outside their area.”

However, section 120 was not relied upon by DCC before the arbitrator. In consequence he made no finding of fact in relation to the question whether DBC required Creebeck for the exercise of its functions under that provision, and he made no decision in relation to it, and therefore no error of law in relation to it.

Conclusion

The result is that for the reasons set out above DCC’s appeal against Mr Spence’s award in relation to Creebeck must be dismissed.

The relevant provisions of the Regulations

The relevant provisions of the Regulations are regulations 13 to 19. For convenience, they are set out in the appendix to this judgment. They have to be considered together with the provisions of Schedule 1 (in fact the only Schedule) to the Regulations. For present purposes, it is sufficient to refer to the fourth and last calculation prescribed by the Schedule. It too is set out in the appendix.

The award of interest related to the principal sum awarded pursuant to regulation 18. The arbitrator’s award sets out in section 4 the rival contentions of the parties and his conclusion:

“4.1

In the POC paragraph 28(c) Darlington claim interest on any sum awarded pursuant to Regulation 18. The entitlement to interest is not challenged in the POR. Darlington accept that since the question of whether I should award interest goes to jurisdiction I can deal with it nevertheless.

Submissions of Durham and Darlington

Durham

4.2

Mr Straker challenges Darlington’s right to interest on the basis that such right only arises if money is not paid by the ‘due date’ which is, under Regulation 17(3), in the absence of agreement, two months plus two weeks after the ‘date of service of the notice setting out the calculations which give rise to the liability to pay’. Since Regulation 16(1) will require Durham to serve a further notice, in addition to the notice of the Initial Calculations already served under Regulation 14, to reflect the effect of this Award and, obviously, they have not yet done so, liability for interest has not yet arisen.

4.3

Durham further submit that whilst there is a general power under section 49 of the Arbitration Act 1996 to award interest that power, in the case of a statutory arbitration, is restricted by section 95 of the Act which provides that ‘(1) The provisions of [section 49] apply to a statutory arbitration (a) as if the arbitration were pursuant to an arbitration agreement and as if the enactment were that agreement.’ The effect of section 95, Mr Straker argues, is that the parties must be treated as having agreed to interest being dealt with in accordance with the regulations and that the Arbitration Act adds nothing to those provisions.

Darlington

4.4

Mr Drabble argues that the notice setting out the calculations which give rise to the liability to pay, referred to in Regulation 17(3)(b), is the original notice under Regulation 14 (in this case the letter dated 13^th October 1997 B540) and that the notice under Regulation 16 giving effect to this award, which, of course, does not yet exist, must be construed as merely amending the original notice under Regulation 14.

4.5

Alternatively Mr Drabble argues that if Mr Straker is right, and the Regulations only provide for interest pursuant to the notice under Regulation 16 giving effect to this award, then there is a lacuna in the Regulations as to what happens in the period between the two notices. In that case, says Mr Drabble, section 49 of the Act can still take effect since, ex hypothesi, there is no requirement of the Regulations which overrides it.

Findings and Reasons

4.6

Under Regulation 14(1)(b) Durham served its notice in respect of its ‘Initial calculations’ on 13/10/97 (B540). On 4/12/97 Darlington notified Durham pursuant to Regulation 14(4) that it disagreed with the initial calculation. The parties then by agreement referred the dispute to me for arbitration under Regulation 19. If the result of this arbitration is that all or part of the Capital Reserve should be apportioned then Durham will have to serve a further notice under Regulation 16. The ‘notice giving rise to the liability to pay’ is, in my opinion, the Regulation 14 notice not the Regulation 16 notice which merely affects an amendment to the original notice.

4.7

Any other construction of the Regulations would produce a result that is both absurd and inequitable.

4.8

It may be, as Mr Drabble suggested, that the draftsman of the Regulations did not anticipate there being a gap between the Regulation 14 notice and the Regulation 16 notice of as much as five years and made no specific provision for interest during that period. Alternatively, therefore, if I am wrong in my construction of the Regulations, I agree with Mr Drabble that I have jurisdiction under section 49 of the Act to deal with the lacuna.”

(Italics as in original)

The Arbitrator’s dispositive award in so far as relevant is as follows:

“6.1

Darlington Borough Council’s claim for a pro rata share of the line 85 reserve, namely £2,211,050 (ie 17.151971% of £12,890,939) succeeds.

6.2

(1) Durham County Council shall pay interest on the said sum in accordance with and at the rate prescribed by Regulation 18 from 27^th December 1997, alternatively (2) pursuant to the powers given to me by section 49(3) of the Arbitration Act 1996, Durham County Council shall pay interest on the said sum from 27^th December 1997 until the date which is two months and two weeks after the date of service of the notice under Regulation 16 and thereafter shall pay interest pursuant to Regulation 18. During both periods the rate of interest shall be as prescribed by Regulation 18(2)(a).”

There are two bases for the award of interest put forward by DBC: the provisions of the Regulations and the power of the arbitrator to award interest under the Arbitration Act 1996. I entirely agree with the arbitrator’s comments on the unfairness of DBC not receiving interest on the sum in dispute in the arbitration. DCC had the use of that sum for a considerable period; DBC was kept out of its money for that period. However, ultimately the question before me is whether the award of interest made by the arbitrator is consistent with the terms of the Regulations.

Interest under the Regulations

For the purpose of Part III of the Regulations, DCC is a designated authority and DBC a participant authority.

The obligation under the Regulations is to pay interest “in respect of any sum which has become payable by virtue of this Part and has not been paid by the due date”. “The due date” is defined in regulation 18(5), but the definition does not take one further. The arbitrator was concerned with the calculation of sums in accordance with Schedule 1 to the Regulations, to which paragraph (1), and therefore paragraph (3), of regulation 17 applied. Regulation 17(3) required the sum to be paid on or before an agreed date and in default by the date 2 months and 2 weeks after the date of service of “the notice setting out the calculations which give rise to the liability to pay”.

The Regulations provide for the service of a number of notices setting out calculations; and the crucial question of their construction is whether the notice in question is that served under regulation 14 or that served following the arbitrator under regulation 16.

The Regulations envisage a series of notices setting out calculations, each of which after the first will modify the calculations in the original regulation 14(1) notice. The modification may be voluntary, as in a notice under regulation 14(2); it may result from the participant authority notifying the designated authority that it does not agree with the participating authority’s calculations and the latter in consequence modifying its calculations and serving notice under regulation 14(5); the new calculation may result from the audited accounts of the designated authority, and be contained in a notice under regulation 15(1); or it may follow from the resolution of a difference by an arbitrator, in which case the relevant notice is served under regulation 16. Regulation 17 requires (subject to paragraph (2)) a payment to be made of the amount calculated in accordance with the formula in paragraph 8 of the Schedule shown as due by one authority to the other in each calculation set out in a notice. That this is so is clear from the terms of paragraph (2), which require a lesser amount to be paid if a designated authority has given a notification that it disagrees with a calculation, from the wording of paragraph (3), and from paragraph 8 of the Schedule, which requires earlier payments to be taken into account whenever a calculation is made. This is why regulation 17(3) refers to “Any sum”, rather than “The sum”, and to “the date of service of the notice setting out the calculations which give rise to the liability to pay”: the Regulations envisage more than one payment and more than one such notice.

It follows that “the notice setting out the calculations which give rise to the liability to pay” the principal sum to which the arbitrator held DBC to be entitled was the notice served under regulation 16 following his award. Until that notice was served, nothing was payable under his award. It follows that no interest was payable under regulation 18 before the date of the award. In my judgment, a notice served under regulation 16 cannot be regarded as an amendment of a notice served under regulation 14(1): the notion of amendment of notices is absent from the Regulations. Significantly, the Regulations refer to substitution of calculations where this is envisaged: see regulation 14(2).

Mr Drabble candidly and characteristically conceded that his construction of regulation 17(3) and (18) is not a natural construction of their words. I fully accept his submission that DCC’s construction is productive of injustice, since it means that the Regulations do not recompense DBC for having been kept out of its money for some 6 years. If there were an ambiguity, I should resolve it in favour of DBC. But there is none.

It follows that the arbitrator erred in law in awarding interest under the Regulations.

Interest under the Arbitration Act 1996

The power to award interest is contained in section 49 of the Arbitration Act, which is in Part I of that Act:

“49.

—(1) The parties are free to agree on the powers of the tribunal as regards the award of interest.

(2)

Unless otherwise agreed by the parties the following provisions apply.

(3)

The tribunal may award simple or compound interest from such dates, at such rates and with such rests as it considers meets the justice of the case—

(a)

on the whole or part of any amount awarded by the tribunal, in respect of any period up to the date of the award;

(b)

on the whole or part of any amount claimed in the arbitration and outstanding at the commencement of the arbitral proceedings but paid before the award was made, in respect of any period up to the date of payment.

(4)

The tribunal may award simple or compound interest from the date of the award (or any later date) until payment, at such rates and with such rests as it considers meets the justice of the case, on the outstanding amount of any award (including any award of interest under subsection (3) and any award as to costs).

(5)

References in this section to an amount awarded by the tribunal include an amount payable in consequence of a declaratory award by the tribunal.

(6)

The above provisions do not affect any other power of the tribunal to award interest.”

Section 49 applies to statutory arbitrations by virtue of section 94, with the modifications referred to in section 95:

“94.

— (1) The provisions of Part I apply to every arbitration under an enactment (a “statutory arbitration”), whether the enactment was passed or made before or after the commencement of this Act, subject to the adaptations and exclusions specified in sections 95 to 98.

(2)

The provisions of Part I do not apply to a statutory arbitration if or to the extent that their application—

(a)

is inconsistent with the provisions of the enactment concerned, with any rules or procedure authorised or recognised by it, or

(b)

is excluded by any other enactment.

(3)

In this section and the following provisions of this Part ‘enactment’—

(a)

in England and Wales, includes an enactment contained in subordinate legislation within the meaning of theInterpretation Act 1978;

(b)

…

95.

—(1) The provisions of Part I apply to a statutory arbitration—

(a)

as if the arbitration were pursuant to an arbitration agreement and as if the enactment were that agreement, and

(b)

as if the persons by and against whom a claim subject to arbitration in pursuance of the enactment may be or has been made were parties to that agreement.

(2)

…”

The effect of section 95 is that the enactment concerned is to be treated, for the purposes of Part I, as if it were an arbitration agreement between the parties. It follows that the power to award interest under section 49 is excluded if the enactment, here the Regulations, “otherwise” provides. There is to some extent a duplication between that consideration and the test of inconsistency laid down in section 94, doubtless because section 49 is one of the Part I powers that the parties to a consensual arbitration agreement are free to exclude or modify. The words “otherwise agreed” in section 49 envisage an agreement relevant to the powers of the tribunal to award interest. Section 94(2) contemplates the possibility of a more general exclusion or limitation on the provisions of Part I.

While considering whether the Regulations exclude the arbitrator’s power to award interest, it is necessary also to address Mr Straker’s submission that the award in this case was not an award to which section 49 applies, because no amount was awarded by the arbitrator, whose function was to determine a difference notified under regulation 14(6), leading to the service of a notice under regulation 16 which would itself bring a debt into existence. The award was clearly not an award within section 49(3) construed without reference to section 49(5); but Mr Drabble submitted that the award was a declaratory award to which that subsection applied. The award was clearly a declaratory award (see the terms of the dispositive part of the award set out above), and an amount was payable following it. It does not, however, follow that an amount was payable “in consequence of” the award within the meaning of section 49(5). No amount was payable until a notice was served under regulation 16. On a strict reading of section 49(5), therefore, the principal amount in issue between DCC and DBC in the Cochrane arbitration became payable not in consequence of the declaratory award, but in consequence of the regulation 16 notice.

Is this the correct application of section 49(5) to the Regulations? No authority was cited to me as to the correct interpretation or effect of section 49(5). The Report of the Departmental Advisory Committee on Arbitration Law under the chairmanship of Lord Saville on the Arbitration Bill that preceded the Arbitration Act 1996, and their Supplementary Report on the Act itself, do not refer to it. It is similarly ignored in their commentaries by the editors of Russell on Arbitration, 22^nd edition, and by Lord Mustill and Stewart Boyd QC in the 2001 Companion to the 2^nd edition of their book on Commercial Arbitration.

The provisions of section 49 have to be construed together and consistently. In my judgment, it would be anomalous to interpret subsection (5) as empowering the arbitrator to award interest in circumstances where, if he could have made a monetary award, it could not have carried interest under subsection (3). Paragraph (b) of subsection (3) is intended to do no more than to empower the arbitrator to award interest in a case where the damages or debt claimed are paid before the date of the award. It is doubtless possible to read the word “outstanding” in subsection (3)(b) as including a sum required by an agreement to be paid but not due or payable at the commencement of the arbitration, but that is not a natural reading.

More relevantly, in my judgment it is inconsistent with a provision that provides for interest to be payable after specified things have been done following an arbitration (in the instant case, the making by a designated authority of a calculation following an arbitration and service on a participant authority of a notice setting it out) for an arbitrator to have power to award interest in respect of a prior period. The principal sum which is the subject of the award in the present case was not outstanding (in the sense of being due but unpaid) at the commencement of the arbitral proceedings between DCC and DBC or indeed on the making of the award.

It follows that in my judgment, Mr Cochrane’s award was not an award within the meaning of section 49(5): the principal sum did not become payable in consequence of it; and the Regulations do provide “otherwise” or are inconsistent with a power to award interest in respect of the period before the service of a regulation 16 notice and the expiration of the time limited for payment by regulation 17.

Mr Straker also submitted that even if the discretionary power of the arbitrator was available to him, it was impermissible as a matter of principle to award interest under the Arbitration Act in respect of a period before the principal sum was payable. In this connection, he relied on the decision of HH Judge Havery in BP Chemicals Ltd v Kingdom Engineering (Fife) Ltd [1994] 2 Lloyd’s Rep 373. Mr Drabble did not suggest that the decision in that case was wrong; he sought to distinguish that case on the basis that there the decision that had deferred bringing the debt into existence was that of an independent third party, the engineer appointed under the contract between the parties, whereas in the present case the decision – and therefore the fault – is that of the ultimate debtor, DCC, whose regulation 14 calculation was shown to be wrong. I have much sympathy with this argument, and, as I have already stated, with the proposition that fairness required the payment of interest from 2 months and 2 weeks after the date of DCC’s regulation 14 notice until the date of payment. The difficulty with Mr Drabble’s argument is that the Regulations expressly provide for the interest that is to be paid following an arbitration award (and that the sum in question is not payable until steps have been taken following the award). Of necessity, an award is made because there was a prior difference between the two authorities, one of which was right and the other wrong, wholly or in part. Parliament must therefore must be taken to have envisaged that delay in payment would be the responsibility of an unsuccessful party in an arbitration, but nonetheless made the provision it did.

If the Regulations were a contract between two parties, and there were delay in service of the regulation 16 notice, it may be that the party in default would be liable in damages, equivalent to interest, for that delay. That consideration would not lead to an award of interest for the period before the timely service of a regulation 16 notice. Since the regulations are not a contract, that possibility may not be open to the authorities in question; but that does not affect the underlying difficulty of awarding interest in respect of a period before it is payable under the Regulations.

For these reasons I hold that the arbitrator did not have power to award interest for the period before it became payable under the express provisions of the Regulations; and that, if he did have such power under the Arbitration Act 1996, he erred in principle in awarding such interest, in circumstances where it was not made payable under the Regulations.

Conclusion

DCC’s appeal against the award of interest made by Mr Cochrane succeeds. Paragraph 6.2 of his award will be set aside.

13.-(1) In this Part-

“the final accounts” means the accounts of the relevant authority for the final year;

“the accounts date” means the date on which the responsible financial officer signs the statement of accounts prepared in relation to the final accounts (1);

“designated authority” means-

(a)

in a case where there are two or more successor authorities in relation to an abolished authority which are principal councils, the successor authority which is specified in a section 17 order as the designated authority in relation to this Part; and

(b)

in the case of the relinquishing authority and the acquiring authority in relation to a transferred area, the relinquishing authority;

“the final year” means the financial year ending immediately before the reorganisation date;

“participant authority”, in relation to a designated authority, means-

(i)

in a case where the designated authority is one of two or more successor authorities in relation to an abolished authority which are principal councils, any other such successor authority; and

(ii)

in a case where the designated authority is the relinquishing authority in relation to a transferred area, the acquiring authority in relation to that area;

“the relevant authority”, in relation to a designated authority and any participant authority, means-

(a)

where those authorities are successor authorities in relation to an abolished authority, the abolished authority; and

(b)

where the designated authority is the relinquishing authority in relation to a transferred area and the participant authority is the acquiring authority in relation to that area, the relinquishing authority.

Any notice under this Part which sets out calculations made in accordance with Schedule 1 shall include an explanation of the basis on which the amount or value ascribed to each of the items of the formulae in that Schedule was determined.

Any notification by a participant authority under this Part that it disagrees with any calculations made by the designated authority in accordance with Schedule 1 shall state the reasons for the disagreement.

A participant authority may, within one month of service by a designated authority of a notice under this Part, request that authority to supply such information relating to the contents of the notice as may be specified in the request; and the designated authority shall, as soon as is reasonably practicable, supply the information.

14.-(1) A designated authority-

(a)

within such period as that authority and each participant authority may agree or, failing such agreement, the period of one month beginning with the accounts date, shall make calculations in relation to each participant authority in accordance with Schedule 1; and

(b)

as soon as is reasonably practicable, shall serve on each participant authority a notice setting out the calculations it has made in relation to that authority and any other participant authority.

At any time within the period of two months beginning with the date of service of the notice mentioned in paragraph (1) above, a designated authority may serve on each participant authority one further notice setting out calculations made in accordance with Schedule 1 in substitution for the calculations set out in the first-mentioned notice.

A notice under paragraph (2) above shall include a statement of the designated authority's reasons for serving it.

Not later than the expiry of the period of two months beginning with the date of service of a notice under paragraph (1) or, where a notice has been served under paragraph (2) above, the date of service of that notice (“the relevant period”), each participant authority shall notify the designated authority and any other participant authority in writing whether or not it agrees with the calculations set out in the notice.

Where a participant authority, pursuant to paragraph (4) above, notifies the designated authority that it does not agree with the calculations set out in a notice under paragraph (1) or, as the case may be, paragraph (2) above, the designated authority shall, not later than the expiry of the period of one month beginning with the end of the relevant period, serve on each participant authority a notice which either-

(a)

sets out calculations made in accordance with Schedule 1 in substitution for the calculations set out in the notice under paragraph (1) or, as the case may be, paragraph (2) above; or

(b)

states that the designated authority does not intend to make any such calculations and the reasons for not doing so.

A participant authority may, within the period of two months beginning with the date of service of a notice under paragraph (5) above, notify the designated authority and any other participant authority in writing that it disagrees with any substitute calculations set out in the notice or, where the notice does not set out such calculations, in respect of the calculations set out in the notice under paragraph (1) or, as the case may be, paragraph (2) above.

A participant authority may, not later than the expiry of the period of two months beginning with the date of service of the notice under paragraph (1) above, notify the designated authority and any other participant authority in writing that it disagrees with the calculations set out in the notice.

Where amounts or values are ascribed in the determination to any items of the formulae in Schedule 1, the designated authority shall ascribe those amounts or values to those items when making the calculations required by paragraph (1) above.

17.-(1) Subject to paragraph (2) below-

(a)

where the amount calculated in relation to a participant authority in accordance with the formula in paragraph 8 of Schedule 1 is a positive amount, the designated authority shall pay to the participant authority a sum equal to that amount; and

(b)

where the amount so calculated is a negative amount, the participant authority shall pay to the designated authority a sum equal to that amount expressed as a positive amount.

Where notification has been given by a participant authority under regulation 14(6) or 15(2) that it disagrees with any calculations made by the designated authority, any sum required, by virtue of paragraph (1) above, to be paid by that authority, any other participant authority or the designated authority in respect of those calculations shall be reduced by 20%.

Any sum payable by virtue of paragraph (1) above shall be paid on or before-

(a)

such date as the authority by whom (“the paying authority”) and the authority to whom (“the payee authority”) the payment is to be made may have agreed during the period of two months beginning with the date of service of the notice setting out the calculations which give rise to the liability to pay; or

(b)

failing such agreement, the day (other than a Saturday, a Sunday or a Bank Holiday) which falls two weeks after the end of that period.

Where the authorities concerned so agree, any liability to pay a sum by virtue of this Part may be discharged, in whole or in part, by the transfer to the payee authority of investments held by the paying authority.

At any time after the reorganisation date, the designated authority or a participant authority may each make a payment on account to the other in respect of any sum which the authority estimates it will be liable to pay to the other in consequence of calculations to be made in accordance with paragraph 6 of Schedule 1.

Interest payable under paragraph (1) above-

(a)

shall be calculated in accordance with such method as may be agreed between the paying authority and the payee authority or, failing such agreement, shall be simple interest calculated on the unpaid amount in respect of the period beginning with the due date and ending with the day before the day on which the sum is paid at a rate equivalent to two per cent. above the highest base rate quoted by any of the reference banks at any time during that period; and

(b)

shall be paid at the same time as the sum is paid.

…

…

In this regulation-

…

“the due date” for payment of a sum is a reference to the date on or before which the sum is required to be paid; and

“sum” includes a reference to a part of a sum.

PART IV

19.-(1) Any question as to the interpretation or application of any provision of these Regulations may be determined-

(a)

in the case of a question as to the interpretation or application of regulation 9, by the Charity Commissioners; and

(b)

in any other case, by a person agreed on by the parties concerned or, in default of their agreement, appointed by the Secretary of State;

and–

(i)

any matter which falls to be agreed under regulation 8(4) and is not so agreed; or

(ii)

any difference notified under regulation 5(4), 14(6) or 15(2), shall be determined by such a person.

Section 31 of the Arbitration Act 1950 (1) shall have effect for the purposes of a determination under this regulation by any person mentioned in paragraph (1)(b) above as if such a determination were an arbitration under any other Act within the meaning of that section.

The fourth calculation is-

X is the aggregate of-

(a)

amounts paid by the designated authority to the participant authority by virtue of paragraph (1) of regulation 17 in consequence of calculations previously made in accordance with paragraph 6 above; and

(b)

amounts so paid by virtue of paragraph (5) of that regulation; and

Y is the aggregate of-

(a)

amounts paid by the participant authority to the designated authority by virtue of paragraph (1) of regulation 17 in consequence of such calculations; and

(b)

amounts so paid by virtue of paragraph (5) of that regulation.