Thames Water Utilities Ltd v Heathrow Airport Ltd & Anor

In construing a long-term agreement for comparative operating costs, the contractual “bases” upon which replacement works would have operated may include their hypothetical mode of operation. Where the agreement requires a specialist expert to make a final, once-and-for-all determination, the court should not artificially separate broad principles from the practical manner of operation or leave core operational questions to periodic reconsideration. The construction should support the commercial purpose of comparing like with like, including the effect of future changes in law or regulation on hypothetical and actual operations. Difficulty, uncertainty or the risk that predictions may prove inaccurate does not justify a different construction where prediction is inherent in the agreed exercise.

Thames Water agreed to sell its Perry Oaks sewage-sludge treatment site to Heathrow in connection with the construction of Terminal 5. Heathrow agreed to fund replacement facilities and additional operating costs under an agreement containing a comparative costs mechanism. Clause 7.3.2.1 required the parties to agree the “bases” on which the old and replacement works would have operated, and provided for a final determination by an independent sewage-industry expert if agreement could not be reached.

The parties agreed that the expert would make a final, once-and-for-all determination, but disputed whether the “bases” for the old site included its hypothetical mode of operation. Blair J held that the distinction between basis and mode of operation was illusory: [2009] EWHC 407 Comm. The appeal concerned the proper construction of that provision.

Longmore LJ gave the leading judgment. Patten LJ and Dyson LJ agreed. The appeal was unanimously dismissed.

1. Meaning of “bases”. In the contractual context, the basis on which the Perry Oaks works would have operated included the manner or mode in which the operation would have been conducted. The proposed distinction between broad principles and operational mode was practically illusory. Matters such as sludge consistency and the use of lagoons could not usefully be determined without considering how they would actually have been achieved or used.
2. Finality of the expert determination. The agreement contemplated a final, once-and-for-all determination by a specialist sewage expert. A construction under which detailed operational matters were left for annual or periodic determination would undermine that finality. It would also create the unlikely result that disputes about the notional operation of sewage works would be determined under the general disputes clause by an expert apparently qualified as a solicitor rather than by the specialist sewage expert.
3. Commercial comparison. The interpretation had to accommodate the parties’ objective of comparing like with like. If future legislation or regulation increased the costs of the replacement scheme, the hypothetical costs of the old site also had to be assessed on a basis capable of reflecting that effect. The fact that the exercise involved difficult predictions, or that some predictions might produce a windfall, did not justify the narrower construction.
4. Different treatment of subclauses. Subclause 7.3.2.1(b) expressly contemplated a calendar-year calculation because it concerned actual works. The absence of equivalent annual wording in subclause 7.3.2.1(a) supported a final determination of the hypothetical operation of the old site.

Blair J had therefore reached the correct conclusion. The appeal was dismissed with costs. No interim payment was ordered, and the respondents were not to recover the costs of the detailed assessment.

1. Court of Appeal (Civil Division): The appeal from the Commercial Court was dismissed with costs. No interim payment was ordered, and the respondents were not to recover the costs of the detailed assessment.
2. Queen’s Bench Division, Commercial Court: Blair J determined the construction issue in favour of including the hypothetical mode of operation within the “bases” to be determined by the expert: [2009] EWHC 407 Comm.