Pevensey Coastal Defence Limited v Environment Agency

These are Part 8 proceedings brought by the Claimant (“PCDL”) against the Environment Agency (“the Agency”). The proceedings seek determination of a point of construction in a PFI contract dated 5 May 2000 (“the Agreement”). Under the Agreement PCDL (referred to in the Agreement by the abbreviation, PFIC) provides services to deliver sea defences at Pevensey Bay, Eastbourne, Sussex. The Agreement was for a period of 25 years. It commenced on 1 June 2000 and expires on 1 June 2025.

The Agreement was amended by a Change Agreement dated 8 April 2020. Amongst other matters, this amends Schedule 12 to the Agreement. Reference to the Agreement in this judgment are to the Agreement as amended by the Change Agreement.

The issue for determination in the proceedings (“the Issue”) has been defined in slightly different terms by the parties as follows:

PCDL answer their proposed issue “Yes”, the Agency answer their proposed issue “No”. In reality, there is no material difference between the issues.

Regardless of the absence of material difference, the parties were unable to agree on the wording. In those circumstances the Court will decide. As I indicated in argument, I will adopt the formulation advanced by the Agency as more precisely reflecting the case advanced by PCDL.

The 2 witness statements before me introduce the dispute and exhibit relevant documentation. I do not need to refer to them further.

I set out below some of the terms of the Agreement to which reference has been made:

Relevant definitions are set out in Schedule 1 as follows:

The Service Requirements are set out in Schedule 4. These provide by way of Introduction:

Schedule 11: Calculation of Charges and Deductions provided at Part 4 : Cost of Restoring the Key Physical Features :

The Change Procedures are set out in Schedule 12. Relevant clauses include the following:

Unsurprisingly, there is no issue as to the applicable law which I take as summarised by Lord Hodge in Wood v. Capita Insurance Services [2017] AC 1173 as follows:

Mr Alexander Nissen K.C., who appears on behalf of PCDL, submits that the Agreement provides for PCDL to claim Relevant Cost on a retrospective basis (as PCDL’s formulation of the proposed issue reflects). He draws attention to paragraph 4.2 to Schedule 12 and the investigation as to whether there “has been” a material increase or decrease in the frequency of Storm Events. In the context of consideration as to what has happened in the past, Mr Nissen highlights paragraph 4.3 to Schedule 12 which provides PCDL would only be entitled to claim a Relevant Cost due to there having been a material increase or decrease in Storm Events. In noting that such costs would largely have been incurred by the time of the Report envisaged by paragraph 4.2, he submits that the Agency’s position makes no commercial sense in depriving PCDL of those costs.

This submission is one of five reasons advanced by Mr Nissen as to why there is no limitation of PCDL’s entitlement to costs suffered or incurred in years after the material increase in Storm Events had actually occurred. I summarise below the balance of those reasons as set out in the skeleton argument of Mr Nissen and Mr David Sheard and on which Mr Nissen expanded orally:

By reference to those examples PCDL submits that if costs already incurred at the time at which any Notice/Proposal is submitted are recoverable then the same would apply to paragraph 1.2(g).

Ms Sarah Hannaford K.C., who appears for the Agency makes two main submissions. Firstly, that the construction for which PDCL contends disregards the regime for a Proposal in Schedule 12 in relation to the circumstances in paragraph 1.2(g). Secondly, that such a construction for the purpose of paragraph 1.2(g) would require the Court to re-write the terms of Schedule 12 so as to exclude paragraph 1.2(g) from the regime for a Proposal and/or to convert Schedule 12 into a regime for payment of past costs, rather than a regime for identifying future changes.

In reality, the two submissions are related. Ms Hannaford submits that the necessity to rewrite Schedule 12 is impermissible as a matter of contractual construction and would also involve a fundamental change in the balance of risk to which the parties agreed in the Agreement.

Ms Hannaford identifies provisions in Schedule 12 which, in her submission, would have to be disregarded if paragraph 1.2(g) permitted recovery of Relevant Cost on a retrospective basis. These include paragraphs 1.5(b)(i), (the date from which the Proposal is likely to impact or will impact), 1.5(b)(iii), (an assessment of whether a Relevant Cost or Relevant Saving is likely to be involved” together with “an estimate” of the same), 1.5(b)(iv) (any other impact the Proposal may have on the Project or PCDL’s ability to comply with the Agreement) and 1.5(b)(vi) (mitigation measure “being undertaken”).

The words italicised are Ms Hannaford’s emphasis. They are emphasised in the context of what the parties accept to be mandatory language of the procedure in Schedule 12 (paragraph 1.5(b) refers). This procedure allows the Agency:

Further to this procedure, PDCL can either withdraw the Proposal if the Agency objects (paragraph 1.7) or implement the Proposal in accordance with the Agency’s agreement (or determination in accordance with the Dispute Resolution Procedure) (paragraph 1.10).

Subject to an obligation on the parties to mitigate both delay and Relevant Cost (paragraph 3.5(a)), paragraph 3.1 provides that payment of any Relevant Cost shall be on completion by PDCL of “all steps required to be taken in order to implement the relevant Proposal” or earlier if agreed by the Agency.

Again, the words emphasised in italics are submitted to be inconsistent with a retrospective claim for payment.

The Agreement is not a model of clarity. The parties, understandably, focussed on those clauses which supported the constructions for which they contended. As is apparent from the summary of the parties’ submissions there is clearly tension between different provisions in the Agreement, some of which tend to suggest recovery of retrospective cost whilst others appear more relevant to addressing matters in the future,

Adopting the iterative process described by Lord Mance JSC in Sigma Finance Corporation set out above in the extract from Wood v. Capita Insurance Services I have attempted to ascertain the objective of the Agreement.

In the course of argument, I highlighted the provisions of paragraph 1.1.2 to Schedule 4. As recited above, these set out the principal objectives to achieve the Agency’s aim which is to develop a sustainable policy for the management of the Pevensey Bay Sea Defences that is economically justified and environmentally appropriate and which takes due regard of the natural processes within the sediment sub-cell and the effects of and to adjacent coastal defences as set out above.

Mr Nissen observed that these provisions simply reflected the objectives of the Agency. Ms Hannaford did not place particular reliance on the same. I agree that the provisions do not provide an answer to the question of construction before me: however they do illustrate the Agency’s recognition that the situation may change over a 25 year period and that provision needs to be made to address that change. I do not understand either party to contend otherwise. What divides them is whether, in addressing this dynamic situation, recovery can also be made on what PCDL describe as a retrospective basis.

Central to the difference between the parties is the definition of Relevant Cost. As set out above, in the context of paragraphs 4.2 and 4.3 to Schedule 12, Mr Nissen submits that Relevant Cost can be claimed for costs already incurred (the retrospective basis to which PCDL’s formulation of the issue refers). Ms Hannaford submits that the Change Procedures in Schedule 12, to which any claim for a Change in Circumstances under paragraph 1.2(g) is subject, are not appropriate to such retrospective claims and that the Agreement cannot properly be construed to permit such retrospective claims. As I have noted, examples are given by the parties which are said to support each construction.

The definition of Relevant Cost refers to cost suffered or incurred but makes clear this can be at the relevant time or in the future. The context to Relevant Cost is that it must be suffered or incurred as a result of a Proposal. This suggests, as a matter of chronology, that the Proposal precedes the Relevant Cost because the Agreement views the Proposal as causative of the Relevant Cost. This is difficult to reconcile with a definition which also appears to embrace costs being suffered or incurred at a time other than in the future. The reconciliation is to be found by reading the Proposal as a document in which it is contended there has been a circumstance within the meaning of paragraph 1.2 of Schedule 12 and also contains further information as to how matters may be addressed in the future. Paragraph 1.5(b) of Schedule 12 illustrates there is a distinction between Notice and Proposal, however the reference to costs incurred as a result of the Proposal makes more sense than costs incurred as a result of the Notice. Further, reference to the Proposal also supports a view that the costs under consideration can be those in the future if the matters in the Proposal are accepted.

There was some argument before me as to the natural meaning of proposal. Mr Nissen drew my attention to the definition in the Shorter Oxford English Dictionary “the action or an act of stating or propounding something”. I was not greatly assisted by this. It is clear that a proposal can relate to costs already incurred: “I propose to pay your costs”, just as much as to costs still to be incurred.

Looking at paragraph 1.5(a) to Schedule 12, it is clear that the Notice is required promptly. It must be given as soon as reasonably practicable and in any event within 7 days of the occurrence of the event which is sought to be treated as a circumstance. This is consistent with the ability to manage future expenditure as a central element of the Agreement.

As Mr Nissen readily accepts, the construction contended for by PCDL requires a number of provisions in Schedule 12 to be of no effect, in particular many of those mandatory provisions setting out the Procedure at paragraph 1.5 to Schedule 12. These are mandatory provisions agreed by the parties to apply to a Proposal, the Proposal in turn being defined as the cause of the cost being sought to be claimed.

Similarly and as Ms Hannaford submits, the parties addressed their mind to the applicability or otherwise of provisions of the Procedure. There are specific exceptions carved out, such as at paragraph 1.5(b)(iii) where the requirement to provide an assessment is stated not to apply to events under paragraphs 1.2(n) to (s), with paragraph 1.4 limiting relief to time not money. Having noted that some mandatory provisions would not apply to certain circumstances and addressed this, it is noteworthy that the parties have not said that the provisions of 1.5(b)(i), 1.5(b)(iii), 1.5(b)(iv), all of which I consider are forward looking, do not apply to paragraph 1.2(g). Likewise, it must be recognised that the option to accept or reject the implementation of the Proposal (paragraphs 1.6(a) and (e) refer) is difficult to reconcile with a contended entitlement to costs already incurred or to reduce the Service Levels if it would obviate the necessity for the Proposal (paragraph 1.6(f)).

I can also see no clear commercial justification in allowing retrospective costs to be claimed for the first 20 years in which the Agreement is operative but not for the final 5 years. As I observed in argument, the last five years being most distant from the Effective Date will therefore be the least predictable. As such it is noteworthy that no provision was made for similar recovery under paragraph 1.1(g) for that period. Of course, it may be said that the amount of investigation required and in particular the 10-year period for assessment was significant and, as a matter of chronology, could not be undertaken given the last period was only 5 years. However, I have heard no evidence on this or whether it would have been possible to divide the 25-year period up into, perhaps two 8-year periods and one 9-year period. In argument I asked the parties whether there was any admissible factual matrix as to how the initial Service Requirements were ascertained.

I understand there is no relevant factual matrix and that the Agreement does not assist on this. I therefore leave such considerations out of account save to note that if PCDL’s submission is correct, the parties must be taken to have agreed to provide compensation for the circumstance in paragraph 1.1(g) but to have limited that compensation to only part of the period covered by the Agreement and did not, despite the dynamic situation to which I have referred, provide recovery for last 5 years.

Having noted the absence of clear commercial justification, I recognise that is not the purpose of interpretation to remake what may be seen as a bad bargain and I also recognise that a provision may be a negotiated compromise or that negotiations were not able to agree more precise terms. In relation to the failure to exclude provisions that might not apply to the circumstances in paragraph 1.2(g), there is a saving that this is limited to reasonable details. As Mr Nissen observed, it would not be reasonable to provide details which are not applicable because they do not arise. Whilst that is a strained interpretation, if the proper construction of the Agreement is that it permits recovery of retrospective costs then it follows that certain of provisions must be taken to be inapplicable to the circumstances in paragraph 1.2(g).

It is accepted that elements of PCDL’s claim on its construction of paragraph 1.2(g) are recoverable under separate parts of the Agreement. By its email of 12^th September 2022 PCDL in making a proposed settlement offer in respect of its claim for increased frequency of Storm Events and increased shingle losses set out a calculation of which the following is an extract:

The volume of 51,032m³ is a credit against the claim reflecting recovery pursuant to the provisions of Schedule 11.

Given the inapplicability of many of the provisions of Schedule 12, paragraph 1.5(b) to claims under paragraph 1.2(g) it is also noteworthy that the parties did not set out a separate regime for recovery of those elements not caught elsewhere.

The provisions of Schedule 11 anticipate that the Agency has an option to decide how to deal with a dynamic situation. It may choose to alter the services to provide in the future thereby limiting its expenditure. This ability to plan and budget for the future also finds expression in Schedule 12 in the ability to reduce Service Levels to obviate the necessity for any Proposal (paragraph 1.6(f) refers).

It is this ability to consider the dynamic situation and both plan and budget for the same in the future which, in my judgment, is a central element and intent of the Agreement. In the course of Mr Nissen’s submissions I questioned whether the purpose of paragraph 1.2(g) was to allow a “re-baselining” to that effect. Perhaps understandably it was a description which was rejected by Mr Nissen and embraced by Ms Hannaford. I accept Ms Hannaford’s submission that the wording of paragraph 1.1 of Schedule 12 (and in particular paragraph 1.1(ii) which is relevant to the present analysis) suggests it is not intended to relate to payments for past events but to the management of future obligations.

By reference to the losses claimed then, on the case advanced by PCDL, there would be no ability to manage those costs which are sought under paragraph 1.2(g) because they had already been incurred and were payable. Further, the situation would not be brought to the attention of the Agency until the end of the 10-year period in accordance with the provisions of Schedule 12. This is not consistent with a central element and intent of the Agreement as I interpret the same.

However, as I have already observed, Schedule 11 does provide for recovery of costs already incurred, however the relevant period is significantly less. Notice needs to be given within three months. As such, decisions can be taken as to how such matters are to be addressed although, as to timescale, I note that paragraph 4.6 of Schedule 11 states that any methodology agreed under paragraph 4.5 above shall:

This reflects paragraph 4.5 which provides:

Thus far, my analysis suggests that the intent of the Agreement is that retrospective costs are not recoverable under paragraph 1.2 (g) to Schedule 12. However, given the competing clauses one has to look at the Agreement and such an exercise cannot ignore the provisions of paragraph 4.6 to Schedule 12. On a natural reading this expressly recognises that the Agreement provides for a Relevant Cost (or Relevant Saving) where there has been an increase or decrease in the frequency of Storm Events for the first ten-year period commencing on the Effective Date but provides that where that cost is less than £100,000 neither party is able to claim a Relevant Cost or Relevant Saving under Schedule 12.

Ms Hannaford submits that this does not deal with the period in respect of which PCDL makes its claim. That is correct. Nevertheless, it goes directly to the proper interpretation of Schedule 12 and in particular, the extent of recovery for the circumstances provided at paragraph 1.2(g). Similarly, the fact that it is a prohibition not an entitlement is not an answer. The prohibition recognises that, but for the prohibition, a Relevant Cost may be recoverable in respect of the first 10 years.

The terms of paragraph 4.6 taken with the definition of a Relevant Cost as a cost suffered or incurred at the relevant time or in the future support a conclusion that the parties did intend there to be provision for recovery in circumstance of paragraph 1.2(g) of costs already incurred in the 10 year period determined in accordance with the provisions of Schedule 12. The parties expressly directed their minds to the period and determined that the circumstance 1.2(g) in the Proposal would cover a ten-year period. In turn this supports my conclusion that the costs claimed for the second ten-year period are similarly recoverable (if established).

On that construction, the ability to manage the costs potentially payable by the Agency is limited to future costs and although liable, they will not be able to manage cost already incurred. However, that applies to all circumstances if, as I conclude, Relevant Costs are taken to include costs in addition to those suffered or incurred in the future. The recognition of the past circumstances will still allow management of future costs even if, as I have concluded, the costs of those past circumstances are recoverable in principle. Further I can see no good reason, and Ms Hannaford was unable to identify any, why a claim by an innocent party for the cost consequences of a breach should be limited to future costs only. As I have noted above, this is one of a number of examples where PCDL as the innocent party would be limited to compensation only for future effects. That is a conclusion which would require clear words and is not one to which I am driven on the proper interpretation of the Agreement as a whole.

It follows that, for the reasons set out above, I answer the issue:

It also follows that I do consider that Schedule 12 permits PCDL to claim for Relevant Cost on a retrospective basis in the manner in which it has sought to claim.

I will deal with costs and any consequential matters at a hearing to be fixed should they be incapable of agreement.