Buckinghamshire Council v FCC Buckinghamshire Ltd

Factual and Procedural Background

These appeals arise from a judgment given by His Honour Judge Davies of the High Court on 21 June 2024 concerning a waste management project agreement ("the Project Agreement") entered into on 17 April 2013 between Buckinghamshire Council ("the Council") and FCC Buckinghamshire Limited ("FCCB"). The Council is a waste disposal authority responsible for household waste in Buckinghamshire, while FCCB is a special purpose vehicle within a corporate group undertaking waste disposal and operating facilities under the Project Agreement.

The Project Agreement provided for the construction and operation by FCCB of an energy-from-waste plant at a site in Buckinghamshire ("Greatmoor") and two satellite waste transfer stations ("High Heavens WTS" and "Amersham WTS"). The Amersham WTS was later deemed unnecessary and removed by deed of variation in 2017. FCCB was to process "Contract Waste" from the Council and could handle "Third Party Waste" from other sources. The Council funded 85% of the construction costs, with the remainder funded by FCC group companies, whose costs were factored into the "Unitary Charge" paid by the Council to FCCB.

The Unitary Charge was calculated largely by multiplying amounts of Contract Waste by prices per tonne, with adjustments for "Third Party Income Share," which involved sharing income from Third Party Waste, electricity generated, recyclates, and other sources between the Council and FCCB on a 3:1 basis. The Project Agreement included a detailed financial model ("Base Case") to calculate guaranteed income and costs.

FCCB entered into subcontracts within its corporate group, including one with FCC Recycling (UK) Limited ("FCCR") to source Third Party Waste and pay FCCB guaranteed income plus shared excess income. The Project Agreement resulted from a public procurement process and was intended to run until 2046.

Subsequent contracts between FCC group companies and third parties, including local authorities in Luton, Hertfordshire, and North London, involved waste management services with some waste ultimately delivered to Greatmoor. The Council issued proceedings in 2020 seeking declarations on the meaning and effect of the Project Agreement, particularly regarding the inclusion of income from third party contracts within Third Party Income and the deductibility of costs from such income. A prior judgment by a different judge had determined a broad definition of Third Party Income including income from affiliates related to waste ultimately treated at the Facilities.

The trial judge held that only haulage costs were deductible from Third Party Income and that income from Luton Borough Council was Third Party Income. Both FCCB and the Council appealed aspects of this decision.

Legal Issues Presented

1. Whether FCCB is entitled to deduct various costs from Third Party Income before sharing it with the Council, specifically the interpretation of "costs directly incurred" in the Project Agreement.
2. Whether income received by FCCB from Luton Borough Council constitutes Third Party Income under the Project Agreement.
3. Whether haulage costs incurred by FCCB in transporting waste to Greatmoor are deductible under proviso (c) of the Third Party Income definition.
4. Which party bears the burden of proof regarding the deductibility of costs under the Project Agreement.

Arguments of the Parties

Appellant's Arguments (FCCB)

• The trial judge misconstrued the phrase "costs directly incurred," which should be interpreted as requiring only a causal connection between costs and income generation, not an immediate or exclusive relationship.
• The judge erred in including the unitary charge received from Luton Borough Council as Third Party Income, arguing that the charge related to services unrelated to Greatmoor and was indivisible.
• The judge wrongly placed the burden of proof on FCCB to establish deductibility of costs rather than on the Council to prove entitlement to relief.
• The judge failed to consider relevant procurement documents and guidance that supported a broader interpretation of deductible costs and income sharing.

Respondent's Arguments (The Council)

• Challenges the deductibility of haulage costs, arguing these are barred by provisos (b) and (c) of the Third Party Income definition.
• Contends that costs FCCB seeks to deduct fail to meet the requirement of being "specifically and solely" related to additional Third Party Income beyond the Base Case.
• Maintains that the unitary charge portion attributable to waste sent to Greatmoor constitutes Third Party Income, and the indivisibility argument is not a valid defense.
• Argues that the burden of proof appropriately lies with FCCB to demonstrate that costs are deductible, given its sole knowledge of the costs incurred.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Wood v Capita Insurance Services Ltd [2017] UKSC 24	Contract interpretation based on the objective meaning of language chosen by parties.	Used to affirm that interpretation should reflect what a reasonable person would understand the contract to mean in its factual context.
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896	Principles of contractual interpretation focusing on the meaning conveyed to a reasonable person with background knowledge.	Applied to reject a causal connection interpretation of "directly incurred" costs, supporting a more restrictive reading aligned with ordinary meaning.

Court's Reasoning and Analysis

The court affirmed the trial judge's interpretation that for costs to be "directly incurred" in generating Third Party Income, there must be an immediate and exclusive relationship between the cost and the income-generating activity. The judge's distinction between direct costs and indirect or overhead costs was upheld as consistent with ordinary usage and contractual context. The court rejected the appellant's broader causal connection argument, finding it would render the word "directly" meaningless and potentially allow disproportionate deductions.

The court found no error in the judge's approach to the burden of proof, confirming that while the claimant bears the burden of proving entitlement to relief, FCCB, possessing sole knowledge of its costs, must demonstrate deductibility.

Regarding proviso (a), the court held that costs must be "specifically and solely" related to generating additional Third Party Income beyond the Base Case. The judge's failure to find such specificity in the costs claimed led to their disallowance.

On the issue of income from Luton Borough Council, the court agreed with the judge that such income constitutes Third Party Income, relying on the broad definition adopted in prior unappealed judgment and the fact that waste was ultimately delivered to the Facilities. The argument that the unitary charge was indivisible was rejected as unfair and inconsistent with the contract's objective meaning.

Concerning haulage costs, the court disagreed with the judge's conclusion that these were deductible. It found that proviso (c), barring deduction of costs for handling or processing Third Party Waste by the Contractor or Affiliate, applies generally and is not limited to activities at the Facilities. The court concluded that haulage costs fall within this proviso and are therefore not deductible. It further reasoned that the Council is not unfairly prejudiced as haulage costs were already factored into the Unitary Charge.

Holding and Implications

The court DISMISSED FCCB's appeal with respect to the deductibility of costs and the inclusion of the Luton Borough Council unitary charge as Third Party Income.

The court ALLOWED the Council's appeal in relation to haulage costs, holding that such costs are not deductible under proviso (c) of the Third Party Income definition.

The direct effect of this decision is that FCCB cannot deduct haulage costs from Third Party Income before sharing it with the Council, and the income from Luton Borough Council must be included as Third Party Income. No new precedent was established beyond the application of existing principles of contractual interpretation and the specific terms of the Project Agreement.