Thames Water Utilities Ltd & Anor v Heathrow Airport Ltd & Anor

On the proper construction of a contract providing for an independent expert to determine operational bases used to calculate additional costs, a determination expressed to be final and once and for all should resolve the hypothetical mode of operation as well as its general basis. The court will not create a distinction between “basis” and “mode” of operation where the contract contains no such distinction. A construction allowing matters to be reopened periodically, including to reflect future legislative or regulatory changes, may undermine the agreed finality of the expert process. The absence of any suitable contractual mechanism for resolving such later disputes may support that conclusion.

The parties had agreed arrangements for Heathrow’s acquisition of land occupied by the Perry Oaks sludge disposal works and for the construction of replacement facilities. Heathrow was required to pay Thames Water the additional costs of operating the replacement scheme over the costs that would hypothetically have been incurred at Perry Oaks.

The parties could not agree the operational bases required to calculate those costs. Under clause 7.3.2.1, the matter was to be referred to an independent expert, whose decision was final and binding. Thames Water contended that the expert had to make a single determination of the hypothetical operation for the relevant period. Heathrow contended that the determination could leave the detailed mode of operation open to annual or periodic adjustment, including for future changes in legislation or regulation. The issue was determined under CPR Part 8.

1. Construction approach. The court construed the agreement objectively, reading it as a whole and giving its words their natural and ordinary meaning in the context of the agreement, the parties’ relationship and the relevant surrounding circumstances. The parties’ subjective intentions and previous negotiations were excluded from consideration.
2. Scope of the expert’s task. Clause 7.3.2.1 required the expert to determine the bases on which the Perry Oaks works would hypothetically have operated from 1989 to 2040, and the basis on which the replacement works would operate, be maintained and be replaced. The contractual language did not support Heathrow’s proposed distinction between the basis and the mode of operation. In practical terms, the distinction was likely to be illusory.
3. Finality. The parties had accepted that the expert’s determination would be final and once and for all. A determination leaving the detailed hypothetical operation open for later review or redetermination would undermine that finality. The agreement contained no suitable mechanism for resolving future disputes of the type contemplated by Heathrow; the mechanisms in clause 10 were not an adequate substitute for the specialist expert appointed under clause 7.3.2.1.
4. Disposition. Thames Water’s construction was correct. Once the bases had been determined, the resulting costs could be calculated by the parties, with disputes about accounting matters referred to a chartered accountant under clause 10.4. The court noted that the expert might choose an approach taking future events into account, but any determination would remain final and once and for all. The parties were to be heard on further matters.