Tramtrack Croydon Ltd v London Bus Services Ltd

Tramlink Croydon Limited (“TCL”) holds the concession to run the Croydon Tramlink. The agreement that now governs that concession is the Amended and Restated Concession Agreement (“ARCA”) of 29^th June 2000 made between TCL and London Regional Transport (“LRT”) (Footnote: ¹). London Bus Services Ltd (“LBSL”), the defendant, is LRT’s successor. Under clause 23 of ARCA TCL must accept certain tickets and passes as valid on the Tramlink and also such “additional tickets and passes” as are specified by the Regulator (now the Mayor of London) from time to time. In respect of such tickets or passes clause 23.3 provides that:

“..the parties shall in good faith agree (acting reasonably) the financial arrangements to be put in place to compensate [TCL] for the introduction of such tickets and passes”

Clause 75 of ARCA is an expert determination clause.

The Regulator has specified additional passes. One of those is the Bus Pass which TCL is now required to accept on the Tramlink (Footnote: ²). In respect of these and other passes the parties have agreed interim payment arrangements pending the final resolution of their dispute. They are in disagreement as to how they, and the expert, if need be, are to approach the question of reaching or determining an agreement under clause 23.3 and, in particular, as to the status of a Side Letter dated 21^st November 1996 given by LRT at the time of the original Concession Agreement of that date. There is also a subsidiary dispute as to whether certain passes are additional tickets or passes.

The Croydon Tramlink, established under powers given to LRT by the Croydon Tramlink Act 1994 (a private Act), was one of the earliest projects under the Private Finance Initiative (“PFI”). It combines public and private finance. Negotiations for the concession began in the middle of 1995 when LRT invited tenders (Footnote: ³) to pre-qualify for the construction and operation of the link. In October 1995 four consortia were formally invited to submit a tender, of which TCL was one. The TCL consortium was then comprised of (i) Sir Robert McAlpine Ltd and Amey Construction Ltd as the Construction Joint Venture; (ii) CentreWest as the intended operator; (iii) Bombardier Eurorail as the intended tram supplier; and (iv) Royal Bank of Scotland as proposed funder (Footnote: ⁴).

LRT provided an Information Memorandum, which explained:

The Memorandum made plain that the Concessionaire’s revenue from the project would come from three main sources:

The Memorandum gave an estimate as to how the Tramlink ridership and the revenue therefrom (Footnote: ⁸) would be divided as follows:

Tramlink opened on 10^th May 2000. Thereafter the actual breakdown of ridership and revenue figures as between the three types of customer differed from the LRT estimate. Passengers paying in cash have always represented a minority of TCL’s passengers and the revenue from those passengers a minority of revenue. Cash fares have never exceeded 28.6% of revenue. As can be seen from the above table the revenue per journey was estimated to be higher for cash fares than Travelcards or concessionary fares and, in relation to adults, that has in practice always been the case.

Clause 3.1 of the CA obliged TCL to develop, finance, construct, operate and maintain the Tramlink System, and to do so at its own risk and (save as expressly provided) without recourse to LRT, Government or other public funds or guarantees, then or in the future.

By clause 3.2 TCL was throughout the Concession Period of 99 years (Footnote: ⁹) to comply in full with, amongst other things, the CA, the Off-Tram Revenue Agreement and the Performance Specification.

Clause 4.1 dealt with Risk Allocation. Clause 4.1 (h) provided that TCL would assume the risks arising from “legal and regulatory requirements and approach”.

Clause 5.1 acknowledged that it was LRT’s duty under section 8 of the LRT Act to determine the level and structure of fares to be charged and the level, structure and frequency of services provided under agreements such as, and including, the CA.

Clause 23.1 of the CA provided:

“While this agreement continues to be an agreement which is subject to section 3 (2A) (a) of the LRT Act and/or [LRT] continues to be under a statutory duty to determine the general level and structure of fares to be charged on the Tramlink System, [LRT] shall determine the said level and structure of fares and [TCL] shall charge fares and make available tickets in accordance with the level and structure so determined by [LRT] from time to time. “

Clause 23.3 provided:

Clause 23.5 provided that subject to the Off-Tram Revenue Agreement, TCL would have the sole right to revenue in addition to the receipt of fares arising out of the operation of the Tramlink system during the Concession Period.

Clause 35.1 contained an acknowledgement by TCL that it had prior to the date of the agreement delivered to LRT its Financing Plan and that the Equity Investment invested or to be invested by its shareholders in TCL pursuant to the Finance Agreements reflected that Financing Plan (the BCFM). Mr Heath, the Project Manager of LRT initialled that document but made clear that he was not thereby endorsing the contents of the model.

Clause 37 provided for payment of public money to TCL up to a maximum of £ 98.35 million,

Clause 41 of the CA provided for compensation to be payable by LRT to TCL in the event that the overall level of fares charged by LRT did not increase in line with certain assumptions (linked, broadly, to the rate of inflation). Compensation was to be paid in accordance with a complicated Fares Compensation Formula (“FCF”). Such compensation was only payable:

Clause 44 of the CA provided for compensation to be payable by LRT to TCL in certain events including:

By Clause 44.2 LRT’s obligation to pay compensation in relation to Bus Related Events was to terminate on 21^st November 2006. The obligation to pay compensation in relation to the Introduction of SVTs was to last for the Compensation Calculation Period which was to end on the 20^th anniversary of the Concession Award Date, being the date when all the conditions precedent to the CA had been satisfied. Clause 44 specified other “Compensation Events” requiring payment of the Financial Impact Sum i.e., for the most part, the loss of Net Operational Revenues suffered by TCL as a result of the event in question. Clause 44.3 provided that LRT would compensate TCL in respect of Stored Value Tickets by paying the Financial Impact Sum i.e. the amount by which for each relevant period TCL’s Net Operational Revenues were less than they would have been but for TCL being required to accept such tickets on Tramlink; and Clause 44.5 provided for account to be taken of a number of matters in calculating that sum.

Clause 48 provided that the Compensation payable under clause 44 was to represent “the sole entitlement of [TCL] to compensation in relation to the circumstances constituting the relevant Compensation Event” and TCL was to have no other rights or remedies, and LRT no other liability to TCL, “whether under this agreement or at law”, in respect of such circumstances.

Clause 73 of the CA provided:

“73.4.

Each of the parties warrants and confirms to the others that it has not entered into this agreement in reliance on, nor has it been induced to enter into this agreement by any representation, warranty or undertaking made by or on behalf of the other (whether express or implied by statute or otherwise) which is not set out in this agreement.

73.5

This agreement and the documents referred to in it contain the whole agreement between the parties relating to the subject matter of this agreement and supersede all previous agreements between the parties relating to that subject matter.”

Clause 75 provided that “any dispute, failure to agree or other difference” between the parties under the agreement should be referred to expert determination in accordance with the provisions of Schedule 13 which provided for the appointment of such an expert and a dispute resolution procedure.

The effect, therefore, of the LRT Act and the CA was that LRT had a statutory duty to determine the level and structure of fares to be charged for travel on Tramlink. It was contractually entitled to specify “additional tickets and passes”, which TCL was required to accept. The exercise of LRT’s powers in this respect was likely to have an impact on TCL’s revenues from the Tramlink system. That was a risk that TCL took. Save in respect of SVTs, the agreement contained no provision by which TCL was entitled to compensation for the introduction of additional tickets and passes. The FCF only dealt with headline rates and none of the Compensation Events apart from the introduction of SVTs related to additional tickets and passes.

Clause 2.2 of the Performance Specification provided that the Tramlink System would operate as an integral part of the public transport network in Greater London.

Section 10, clause 1.1. provided that:

“The Concessionaire shall conform with London-wide zonal ticketing systems, Travelcard (or its equivalent) and concessionary fares (as described in the [CA]. [LRT] shall determine the level and structure of fares to be charged on the Tramlink System in accordance with clause 23 of the [CA]. The Concessionaire shall accept Travelcards, LT Cards, Concessionary Permits (acceptance on Mondays to Fridays shall be only after 0900 hours), LT Staff Passes and Police Passes and any other multi-modal tickets whose format and nature are determined by [LRT]”.

Section 12 contained a glossary which included the following definitions

“LT Staff Passes means the passes issued to Eligible Employees, their spouses, dependants and children, evidencing their eligibility for discretionary facilities primarily on rail and/or bus services operated or procured by [LRT] and, for these purposes, Eligible Employees means eligible current and former staff of the Corporation and any of its current or former subsidiaries;

Police Passes means the passes, identification card or warrant card issued to any constable of any of Her Majesty’s Police Forces.”

OTRA contained provisions for sharing out the total revenue obtained from

Clause 5 dealt with SVTs. Clause 5.2. provided that TCL should:

“negotiate in good faith with [LRT] to agree any amendments to this Agreement … required in connection with any material changes in Off-Revenue Schemes including (without prejudice to the foregoing generality) in particular the introduction of Off-Revenue Schemes incorporating the use of (i) Stored Value Tickets or (ii) electronic pass recognition systems”

Travelcards were defined as “tickets identified as such and available for use, inter alia, within the Zones on services operated by [TCL].”

The combined effect of the definitions of Off-Tram Revenue, Off-Revenue Schemes and Travelcards is that Clause 5.2 obliges negotiation in respect of amendments to OTRA required in connection with material changes in the OTRA arrangements relating to Concessionary Fares Revenue and Travelcard Tram Revenue (i.e. revenue from tickets identified as Travelcards) (Footnote: ¹³).

During the negotiations leading up to the CA TCL was concerned that the

A corporation which has statutory powers and duties cannot validly contract not to exercise those powers, or only to exercise them in a particular way. For that reason LRT refused to enter into the contractual commitments sought. It was, however prepared to deliver a non binding Side Letter indicating how it currently carried out its duties. In the end TCL reluctantly agreed to accept this, save that, in relation to competing bus services, it held out for a contractual provision, and, as a result, secured the “Bus Related Event” compensation provision.

On 17^th May 1996 Freshfields, LRT’s solicitors, wrote a note on outstanding issues, which they sent to Ashurst Morris Crisp (“AMC”), TCL’s solicitors. This included the following paragraph:

“11.

LT Behaviour

TCL requires compensation for loss of revenue which results from LT exercising statutory duties in relation to:

(1)

the failure to remove and/or the re-introduction of competing bus services (in line with the indications given in the Information Memorandum);

(2)

requiring the Concessionaire to reduce service levels beyond the levels specified in the Performance Specification; and

(3)

requiring the Concessionaire to reduce fares below the Fares Table (Footnote: ¹⁴).

LT’s ability to give comfort on each of these areas is constrained by its statutory duties. The extent of comfort it is able to give is described in the draft Side Letter already distributed. “

In a position paper of 24^th May 1996 LRT’s position was stated to be:

“LT is operating in a statutory environment created by section 3.2. of the [LRT Act] which was not intended for PFI projects. The Side letter was the best position which LT could offer to TCL to deal with these constraints. It was accepted that the provisions taken “cold” appeared unattractive but that they should be acceptable to persons operating with knowledge of dealing with the business i.e. it was necessary to, at a certain level, rely on “faith” in LT rather than contractual provisions”.

The first draft of the letter had been provided by Miss Valerie Chapman (now Mrs Boomla), LRT’s principal in-house solicitor on the Tramlink project, in a letter of 3^rd May 1996 to Mr Mark Elsey, a partner of AMC. This followed a meeting shortly before. It contained no reference to passes or new tickets. That issue did not arise until about July 1996.

On 8^th July 1996 Mr Elsey put in manuscript on the then draft of the CA against

The Concessionaire shall accept as valid for travel on the Tramlink System the passes and tickets specified in [OTRA] and/or set out in the Performance Specification and such additional tickets and passes as are specified by [LRT] from time to time”

the words:

“Presumably – these additional tickets and passes would need to be within the scope of the Off-Tram Revenue Agreement as suitably amended”

The LRT side had this document - as appears from an annotation made on it by Mr Perry Noble, the partner at Freshfields dealing with the matter.

On 11^th July there was a lawyers meeting at Freshfields, which was attended by Mrs Boomla. On that date Mr Elsey listed on the 8^th July document a list of different types of ticket or pass (Footnote: ¹⁵) and added the comment “LT to specify list”. This note was given to LRT.

On 19^th July Freshfields sent to AMC a revised draft of the CA reflecting the results of the lawyers’ meeting and subsequent consultations that Freshfields had had with LRT. Mr Kendall, the then Project Manager of TCL, saw that draft. The draft indicated that where issues were outstanding they were indicated by footnotes. A footnote to clause 23.3 read:

“LT will confirm in the Side letter to TCL that tickets and passes introduced after signature will be for cash fares, covered by the Off-Tram Revenue Agreement or TCL will be reimbursed by LT or other persons”.

This note reflected the existing sources of revenue (Cash, Travelcards and Concessions) and became, with some changes (Footnote: ¹⁶), the wording of the relevant paragraph of the Side letter (see paragraph 42 below).

On 1^st August 1996 Mr Elsey sent to the solicitors for the banks, the banks themselves, and AMC, a version of the Side Letter which incorporated, for the first time, a paragraph about new tickets and passes. The content of this paragraph was (save for the fact that it omitted the word “as” before “cash fares”) identical to the final version. The version that he enclosed has Mrs Boomla’s footer but it is not clear who the draftsman of the paragraph was. Mrs Boomla did not think that it was herself, so it was probably Freshfields.

The Side Letter, as executed, was dated 21^st November 1996 and signed by Mr

The provision of the Side Letter was one of the conditions precedent to the agreements between the banks and 3i and TCL.

The upshot of the negotiations was, therefore, that TCL became contractually bound under the CA to accept whatever additional tickets and passes LRT might specify and had, in terms, no legal right to compensation. Nor did the CA contain any mechanism for the agreement or determination of any compensation. But TCL had the benefit of an indication in a non legally binding Side Letter that any such tickets and passes would be paid for.

The first section of the Tramlink opened on 10^th May 2000. The system as a whole opened to the public on 17^th July 2000. In June 2000 the CA was replaced by the Amended and Restated Agreement. ARCA came about as a result of a number of matters, of which the most significant are those set out below.

Firstly, the headline rate in the Fares Compensation Formula was a blended mix of the fares available on all modes of transport throughout Greater London. That rate had increased in accordance with (in fact to a slightly greater extent than) the assumptions. But this had been achieved by larger increases in Central London and a holding down of fares in Outer London. TCL wanted to amend the formula so that the benchmark should be the fares on Tramlink alone: a change estimated to be worth nearly £1,000,000 a year to TCL on 2000 figures.

Secondly, the Greater London Authority Act 1999 (“GLAA”) practically abolished LRT’s operations (Footnote: ¹⁷). The GLAA imposed on the Mayor of London the duty to set the general level and structure of fares, which were to be administered by a new body called “Transport for London” (“TfL”) whose duty was to assist him. LRT’s functions were to be split: inter alia part of them was to go to LBSL and part to a company called Transport Trading Ltd (“TTL”). Others went elsewhere.

The relevant sections of the Act were to come into effect on 3^rd July 2000. LBSL was to succeed, as in the event it did, to LRT’s rights and obligations under ARCA pursuant to a Transfer Scheme dated 23^rd June 2000. At the same time TTL and LBSL became subsidiaries of TfL. One purpose of the ARCA was to take account of these changes.

Thirdly, passengers travelling from New Addington to Croydon, who would previously have bought a single bus ticket, needed, following the closure of some bus services which would have been competing with the tram, to travel by bus and tram and to purchase two separate tickets. The cost of these, in combination more than the previous single bus journey, LRT regarded as unfair.

ARCA was entered into on 29^th June 2000. The principal relevant changes were these:

As is apparent, Clause 23.3 of ARCA introduced for the first time as part of the contract an obligation on both parties to negotiate the financial arrangements to compensate TCL for the introduction of additional tickets or passes.

At the same time the parties amended OTRA (which became an agreement between TTL and TCL) so as to include (a) One Day Tram and Bus Passes and (b) Feeder Bus Tickets. I refer to these below.

On 18^th December 2003 LBSL notified TCL by letter that as from 4^th January 2004 it was required to accept Bus Passes on Tramlink, and proposed that LBSL and TCL enter into an agreement to provide for the financial arrangements to compensate TCL for their introduction on Tramlink. The letter indicated that LBSL proposed that the agreement would provide for TCL to be compensated so that its revenue for trips made on Bus Passes would be no worse than it would have been in their absence.

ARCA was the product of substantial negotiations. These negotiations involved, on the part of TCL: Mr Robert Dorey, its then Chairman, Mr Ian Kendall (until August 1999) and Mr Brian Johns (from August 1999), its Project Directors, and Mr Robert Harding, TCL’s general manager. Those involved on the part of LRT included Mr Clive Hodson, a director, and Mr Clive Bradberry, the Project Manager, who took over from Mr Heath in around January 1997.

The negotiations are of significance for four reasons. Firstly, at the beginning of the negotiations (in a letter of 5^th July 1999) TCL expressed the view that the Side Letter gave TCL an entitlement to cash fares for new tickets and passes. Secondly, Mr Bradberry and others at LRT, including Mr Hodson, then believed that that was indeed its effect. Thirdly, Mr Bradberry believed or hoped that the effect of agreeing ARCA and its amendment to clause 23.3 would be to “overcome” the Side Letter. Fourthly, no one said to TCL that the Side Letter was not to have effect or was to be replaced or abrogated by the amendment to clause 23.3.

Mr Bradberry was asked this question:

The question posed of Mr Bradberry was a multiple one and I am not persuaded that his answer should be regarded as sound evidence that, in addition to the letter of 5^th July 1999, there was a series of meetings at which TCL repeated their point on the Side Letter. There was certainly one two days later – on 7^th July 1999 - where the notes record, in relation to Feeder Buses, that:

“TCL pointed to LT’s statement in the letter of comfort concerning new tickets being paid for as cash fares

There is no documentary record of the point arising at any later meeting, and in particular any such meeting after Mr Bradberry’s reply, by a letter of 10^th August 1999 (see paragraph 70), to the letter of 7^th July. Mr Johns’ evidence, which I accept, was that:

“A.

As part of the negotiation the side letter just did not figure in the negotiation, certainly from the time that I took over responsibility in August 1999.

Q Well, it did not figure in the negotiations except where we have looked at it. A. No, it did not figure in the negotiations. I understand that it was a point that was raised in correspondence from Ian Kendall, my predecessor, to London Transport. From there on both parties were silent on the side letter. As far as I can recall, neither TCL nor London Transport commented on the side letter again, and it certainly was not in our mind when we reached the agreement for the ARA.”

There was an internal meeting at LRT on 14^th September 1998. One of the matters under discussion was the possibility of extending the validity of Bus Passes to Tramlink. A note of the meeting records:

“In the light of the Comfort Letter of 21/11/96, it was likely that TCL would view Bus Pass Acceptance on Tramlink as being a “new ticket”, and expect Bus Pass journeys to be compensated for “as cash fares” without adjustment for trip generation. LT’s preferred option is for TCL to be reimbursed at current contracted Travelcard rates, or to reimburse TCL to a level which would leave them no better or worse off than they would have been without Bus Pass acceptance”

In the event LRT decided in December 1998 not to introduce Bus Passes on the tram.

At an internal LRT meeting on 2^nd February 1999 attended by Mr Dick Halle, the strategy director for London Buses, Mr Bradberry, Mr Chandler Stewart (Mr Bradberry’s operations analyst), Mr Richard Parry, and Mr Malcolm Fairhurst (who was part of LT Marketing), the view was expressed, and recorded in a note, that the new FCF should:

On 16^th February 1999 Mr Parry sent Mr Hodson that note under cover of

By May 1999 the proposal that Tramlink should accept Bus Passes had re-appeared. In a memorandum to Mr Hodson of 13^th May Mr Parry noted that, in that event, TCL might claim reimbursement pursuant to the Side Letter at a level equivalent to a cash fare, but that agreement of an FCF favourable to TCL would have to be linked to acceptance of Bus Passes.

By June 1999 LRT had decided that a One Day Tram and Bus Pass would be introduced. despite TCL’s reluctance to accept one until after Tramlink opened. An LRT paper of 25^th June 1999 comparing positions included the following:

In a letter of 2^nd July 1999 Mr Bradberry told Mr Kendall that LRT had decided against going ahead with the Bus Pass proposal but did intend to go ahead with the One Day Tram and Bus Pass proposal, priced at a premium above the One Day Bus Pass, and that LRT and TCL would need “to discuss the detail of the settlement arrangements for this new product”.

By a letter of 5^th July 1999 Mr Kendall, on behalf of TCL, put forward a number of proposals described as “wherever possible taken from concepts and principles agreed in the [CA] and/or [the Side Letter]”. He expressed the view that the new through tickets then proposed (the “Feeder Bus Through Ticketing/Tram to Bus Pass”) were covered by the Side Letter, that LRT’s proposals were at odds with that, said that “LT must deliver to TCL 100% of the cash fare which is established for the through bus and tram service” and invited “reconfirmation of the [Side Letter] provisions for cash payment as such are critical to TCL not requiring further undertakings”.

TCL never got that confirmation (Footnote: ²⁰). Nor was it told that the Side Letter did not apply, or did not mean what TCL claimed it meant.

At a meeting on 7^th July TCL asked for a deferment of the introduction of the One Day Bus/Tram pass and, in relation to feeder buses, referred to the Side Letter “concerning new tickets being paid as cash fares”: see paragraph 57 above.

On 27^th July LRT decided, at an internal meeting, that the new Bus/Tram pass would be treated in the same way as the Travelcard in respect of the payout to TCL and Bus Operators.

On 10^th August 1999 Mr Bradberry replied to Mr Kendall’s letter of 5^th July. His letter dealt with several topics including Fares and Fares Compensation. He said that the cost of the feeder bus through ticket could be no more than the cost of the tram only portion of the journey, that LT Buses would expect an equitable proportion of the through ticket revenue, and that LRT proposed a separate term to be added to the compensation formula to compensate TCL for the value of the lost portion of the ticket. The proposal (contained in Schedule 3 to the letter) was that LRT would retain 50% of the fare paid on the bus; but remit 50% to TCL under the Fares Compensation Formula. So TCL were not being paid a cash fare; but they would receive the equivalent. This was later given effect by adding “Feeder Bus Tram Revenue” to Schedule 1 of OTRA and providing that that should mean 50% of Feeder Bus Revenue defined as “revenue from tickets sold on designated buses valid for single or return through journeys involving an interchange between bus and tram” and by amending the FCF.

He also indicated that LT had no current plans to require Bus Passes to be accepted but did intend to introduce a One Day Tram and Bus pass priced at £2.80 as soon as possible. (The One Day Bus Pass was then £2.60). He proposed a revenue apportionment on the following basis. He postulated an average use of a One-day Tram/Bus Pass on:

The result, he suggested, would be that there would be no material revenue losses by TCL. This was because the number of tram trips made by cash fares, in the absence of the ticket (i.e. the new pass], would be 2 or 3, say 2.5 on average. At a cash fare of 90 pence that would represent £2.25. This was in effect a proposal to treat the new ticket as a Travelcard, and bring it under OTRA with a payment that would ensure that TCL was no worse off on account of the introduction of the new pass (Footnote: ²¹). If TCL were to receive cash fares they would get 90p x 4 i.e. £3.60.

His letter included the following paragraph:

“Future tickets: On the basis of the above, LT believes its revised proposals for fares compensation address TCL’s concerns over future fares policy. It is therefore LT’s intention that any future tickets introduced have settlement arrangements consistent with the form of tickets proposed. These new tickets will form part of the Tramlink Headline Fares basket (Footnote: ²²) and the method of their inclusion into the calculation will be agreed with TCL”

This paragraph, which was, in effect, LRT’s response to TCL’s request for confirmation of the applicability of the Side Letter, was obviously not an acceptance that TCL was entitled to receive cash fares for new tickets and passes. Nor was it a statement that made any reference to the Side Letter. The proposal that new tickets would have settlement arrangements consistent with the form of the tickets proposed was not developed in those terms. What was developed was an agreement that there would be a negotiation.

On 20^th September 1999 Mr Johns responded to the letter of 10^th August 1999. In his letter he wrote:

“In order to resolve the Fares and Fares Compensation issue we are prepared to accept a large number of your proposals, subject only to resolution of detail (which is further discussed in the Appendix to this letter). Although all of the details are important, they should not raise any issue of principle. We are concerned only to achieve an equitable solution.

There are, however, five issues which still require resolution”

The five issues did not relate to future tickets (save for a point about the cost of upgrading the vending machines). Paragraph 1.4. of the Appendix read:

“1.4.

Passes

The tram/bus pass and proposed method of compensation is acceptable to TCL in principle. However, LT’s assumption that this will have no adverse effect on TCL is currently being validated by CBP (Footnote: ²³)…”

In effect LRT’s proposal was accepted in principle.

In a letter of 7^th October 1999 Mr Johns of TCL repeated TCL’s acceptance of the principle of a One Day Tram/Bus pass, and asked for confirmation that those tickets would form part of OTRA and that “the shortfall resulting from these discount tickets would be reimbursed to TCL in accordance with [the FCF]” (Footnote: ²⁴).

On 17^th December Mr Bradberry produced a schedule setting out the parties’ respective positions which included the following:

Further correspondence of 17^th, 18^th and 20^th January 2000 confirmed TCL’s acceptance in principle that revenue from the Tram/Bus Pass would be apportioned in accordance with OTRA based on the proposed One Day Travelcard rate, subject to revision of that rate if the assumptions of usage underlying the latter rate proved to be inequitable on either side.

On 20^th January 2000 LRT produced, for internal purposes, a comparison of positions which read:

On 16^th February 2000 Mr Johns sent LRT a schedule of what TCL believed to be the “final position”. On 23^rd February, subject to certain points of clarification, Mr Burberry agreed that to be so.

The result, therefore, was that in relation to the One Day Bus/Tram Pass TCL would get the Travelcard rate but future tickets would be the subject of negotiation. TCL had sought this because it did not want what it had accepted in relation to the Bus/Tram pass to be a precedent in relation to future tickets. It did want, and obtained, what Mr Johns characterized as “a right to be heard”. Mr Bradberry thought that agreeing that in future new tickets would be the subject of negotiation meant that the Side Letter would be inapplicable. Whether or not he was right about that, the result of the negotiations was obviously inconsistent with an entitlement to a cash fare in respect of the One Day Bus/Tram pass and, although less obviously, with any such entitlement in relation to other future tickets.

In a report to the Board of 18^th February 2000, a copy of which would have been sent to the banks, and to which was attached a position paper of 16^th February, Mr Johns gave details of a number of matters that had been agreed and said:

“In return we have had to concede

……..

•

Acceptance of a whole range of areas and ticketing proposals which we, in any case, generally regard as good sense and through which we have established a basis for negotiating reimbursement for future tickets.”

Thereafter the matter was turned over to the lawyers to draft an agreement.

Two basic questions arise:

In Walford v Miles [1992] 2 AC 128 the plaintiffs were prospective purchasers of a photographic processing business. The defendant sellers agreed to “terminate negotiations with any third party or consideration of any alternative with a view to concluding agreements with (the plaintiffs)” and not to deal with a third party or give further consideration to any alternative even if the first defendant received a satisfactory proposal from any third party before close of business on a certain date. It was said to be an implied term of this agreement that so long as the defendants continued to desire to sell the business the first defendant, on behalf of himself and the second defendant, would continue to negotiate in good faith with the plaintiffs.

The House of Lords dismissed an appeal from the Court of Appeal which, by a majority, had held that the alleged agreement was unenforceable. It did so on the basis that an agreement to negotiate lacked the necessary certainty to be enforceable, a duty to negotiate in good faith being “unworkable in practice as it is inherently inconsistent with the position of a negotiating party”. Lord Ackner, who delivered the only full speech, suggested, by reference to the decision of the United States Court of Appeal in Third Circuit in Channel Home Centers, Division of Grace Retail Corporation v Grossman [1986] 795F.2d 291, that an agreement to use best endeavours to reach an agreement did not lack the necessary certainty.

But in Little v Carriage Ltd [1994] 70 P & C.R. 469 Millett, LJ (as he then was) said that there was no difference between an undertaking to use best endeavours to try to agree and “an undertaking to agree, to try to agree, or to negotiate with a view to reaching agreement”, all being, in his view “equally uncertain and incapable of giving rise to an enforceable legal obligation”.

By comparison, in The Queensland Electricity Generating Board v New Hope Collieries Ltd [1989] 1 Lloyd’s Rep 205 the Privy Council, upholding, in this respect, the judgment of the Full Court and of the judge at first instance, considered a long term agreement for the supply of coal which stated that, in respect of purchases after the first five years, the base price and provisions for variation were to be agreed, and which contained a comprehensive arbitration clause. Sir Robin Cooke, as he then was, giving the opinion of the Board stated that, where the parties had agreed an arbitration clause in wide enough terms, the Courts would give full weight to their manifest intention to create continuing legal relations:

“…..their Lordships have no doubt that here, by the agreement, the parties undertook implied primary obligations to make reasonable endeavours to agree on the terms of supply beyond the initial five-year period and, failing agreement and upon proper notice, to do everything reasonably necessary to procure the appointment of an arbitrator. Further, it is implicit in a commercial agreement of this kind that the terms of the new price structure are to be fair and reasonable as between the parties. That is the criterion or standard by which the arbitrator is to be guided”.

Neither party has submitted that the decision in Walford v Miles means that clause 23.3 is devoid of legal content (Footnote: ²⁶) and, in my opinion, rightly so (Footnote: ²⁷). The parties did not limit their agreement to an obligation to act in good faith. They agreed (a) to act reasonably in agreeing and (b) that any failure to agree should be referred to expert determination. In those circumstances the Court can, in my judgment, decide, in the case of dispute, at least what they, and the expert, acting reasonably, are bound to take into account or ignore. An agreement such as this should not be construed to mean that the parties (or the expert) may legitimately take into account anything (however unreasonable or irrelevant) they choose, or that their contractual fate is to be determined by whatever the appointed expert happens (on whatever basis) to decide. Reasonableness is a criterion on which the Court (and the expert) can make a judgment; and, if the parties cannot agree whether it would be unreasonable to take into account, or to exclude, a particular consideration, the Court may determine the question.

There are, however, necessarily limitations on the Court’s power to prescribe the considerations that the parties and the expert must, or cannot, legitimately entertain. The parties’ contractual obligation is to act in good faith and reasonably. Reasonableness is a broad, and to some extent, elastic concept. What is reasonable depends in part on the point of view of the person concerned. Some considerations or proposals may be unreasonable no matter whose point of view is considered – something that no one could think reasonable. The reasonableness of others may depend on whose interests are in question, or, at the least, may be matched by considerations equally reasonable from the opposite point of view. The parties may well put forward proposals which differ without either of them thereby acting unreasonably, much less in bad faith. If the parties cannot agree, the matter must, perforce, be left to the expert for him to decide what he thinks is reasonable.

There is, an added complication. Reliance is placed by both parties on the Side Letter. If the letter was a legally binding document its true meaning would be determined in the light of its terms and such evidence of the circumstances in which it was executed as was admissible for the purpose of construction. Legal rules about construction of contracts cannot, however, apply to a document which was never intended to be binding as a contract.

The law excludes as an aid to construction of the meaning of a contract any consideration of what the parties believed it to mean (Footnote: ²⁸). But such beliefs, at any rate if shared, could be relevant in determining whether or not one party was acting reasonably in seeking to agree (or refuse to agree) a particular financial arrangement in respect of compensation for new tickets or passes, and as to what would be a reasonable agreement to make.

It is convenient at this point to set out the rival contentions of the parties.

TCL contends that the Side Letter means that it is entitled, by way of compensation for the introduction of Bus Passes valid on Tramlink, to the amount of the cash fare which a passenger travelling on such a pass would have paid for his journey(s) if he had paid for a ticket in cash (“ paid for as cash fares”). I call this a “cash fare payment”. That is so whether or not the passenger using the Bus Pass would, without that pass, have made the same journey if he had to pay cash for it. TCL no longer contends that that automatically means that any reasonable agreement between the parties would have to give effect to the Side Letter. But it does contend that the Side Letter must be taken into account by the parties when seeking to agree the financial arrangements to compensate TCL in respect of new tickets, and that, in the absence of some sound countervailing consideration, reasonableness requires that effect should be given to what it says. As a public authority LBSL is bound to act reasonably and to take into account all relevant considerations, including what amounts to a policy statement of its predecessor.

LBSL contends that TCL is not entitled to payment on that basis for a number of reasons.

Firstly, LBSL submits that it can be under no legal obligation to take account of a document intended not to be legally binding. To require it to do so would be inconsistent with the contractual allocation of risk under the CA under which the risk that the Regulator would specify an additional category of tickets/passes was to be borne by TCL. Further, if the Side Letter gave rise to no legal obligation under the CA, ARCA did not invest it with a status that it previously lacked. Clause 23 of ARCA provides its own regime in relation to payment for additional tickets and passes and clause 73 of the ARCA excludes reliance on, or reference to, the Side Letter.

Secondly, the Side Letter does not mean what TCL say it means. It provided that TCL would be paid by one or other of the mechanisms then in place.

Thirdly, a cash fare payment would not compensate TCL for the introduction of new tickets/ passes. It would make TCL better off than it would have been but for their introduction, at any rate for as long as cash tickets are more expensive than other forms of ticket or pass, which is likely to be indefinitely. At present no more than 28% of customers travel on cash tickets. Some of those who take advantage of a newly applicable Bus Pass would not have made the same number of journeys if they had had to pay a cash fare for each of the journeys on which they use it. If they had to do that, some customers would not have made their Bus Pass journeys at all, or not all of them. Some would have made the same journeys (or some of them) using Travelcards. To assume that, but for the Bus Pass, all those who used it would pay the cash fare for every journey would concentrate, not dilute, the fares basket since it would place all users of the Bus Pass in the “Cash” box.

Fourthly, even if LBSL is bound to take the Side Letter into account, and even if that Side Letter contemplates cash fares, LBSL contends that it could properly conclude that the terms of the letter were overridden by other considerations including the fact that paying cash fares would provide TCL with an unjustified and unintended windfall.

LBSL proposes that TCL should be paid what is necessary to put TCL in the position it would have been if the Bus Passes had never been introduced on Tramlink and that they are under no obligation to do anything more than this. In practice what they propose is to look at the proportions of passengers that travelled on cash and Travelcards before the Bus Pass was available on the Tramlink and to calculate a blended rate to reflect the actual yield received by TCL per trip. LBSL’s calculations are that, if TCL are to receive a cash fare payment, they would receive an additional £0.569 per qualifying trip, based upon 2006 fares, leading to an increase in revenue, on the 2006 figure of 11.3 m qualifying trips, of some £6,400,000 per year (Footnote: ²⁹). These figures are not agreed and I make no findings as to their accuracy; but they are an indication of the possible value of the point in issue.

In my view the Side Letter, objectively construed, does not, for the reasons set out in the following paragraphs, mean that TCL was to receive a cash fare payment in respect of additional tickets and passes.

The language of the Side Letter corresponded to what both parties knew were to be the three different ways in which TCL was to receive payment under the CA i.e. (a) by a cash fare; (b) by sharing in revenue derived from a multi modal pass purchased off tram; or (c) by sharing in the revenue derived, not from the passenger, but from some third party such as a group of local authorities financing the provision of concessions. Payment under (b) and (c) involved participation in the sharing mechanism laid down by OTRA. The Side Letter provided for TCL to be paid for additional tickets or passes in one or other of those ways

Mr Wilmot Smith submitted that the letter should be regarded as dealing with (a) cash fares which were to be covered by OTRA; and (b) free tickets which were to be paid for by LT or others. I do not accept this for two reasons.

Firstly, OTRA did not contemplate cash payments for tickets; it contemplated a sharing of revenues derived from a pass, bought “off-tram”, covering more than one mode of transport according to a formula. A ticket could not be paid for as a cash fare and be the subject of OTRA.

Secondly, it seems to me tolerably clear that the methods of remuneration specified were to be viewed disjunctively. The letter as finally drafted is somewhat clumsy because of the interpolation, not in the best place, of the phrase “be introduced by LT on Tramlink and local buses at the same time”. If one leaves that out (Footnote: ³⁰) the end of the paragraph reads:

“…be paid for as cash fares, be covered by the Off Tram Revenue Agreement …or if the tickets are free to users be paid for by LT or other persons”.

The natural reading of that is that the “or” governs the two alternatives which precede it.

In specifying in the Side Letter the three different ways in which TCL might be paid for new tickets and passes the parties must, as it seems to me, have contemplated that, other than for tickets to be paid for in cash, there would be a mode of payment which would fall within the scope of OTRA, as it then existed, or, if the tickets were free, which would come from LRT or a third party

It was, of course, always open to the parties to amend OTRA so as to provide that TCL would be paid a sum calculated by applying the cash fare rate to the number of journeys carried out on the tram pursuant to any new pass. When OTRA was restated it included Feeder Buses, which are cash tickets and for which, by a combination of Schedule 1 and the FCF, TCL received the equivalent of a cash fare payment. At the time of the Side Letter, however, the parties are likely to have had in mind by the words “covered by [OTRA]” that an additional ticket or pass, not being a cash ticket, purchased on the tram, would be dealt with in the same way as the passes falling within OTRA i.e. by sharing the revenue from a pass covering more than one mode of transport in accordance with the extent of its usage on each different mode. (Even the Feeder Bus tickets involve a sharing of revenue (Footnote: ³¹)). I do not believe that the parties contemplated amending OTRA so as to provide for TCL to receive a cash fare payment.

The argument from want of utility