The Manchester Ship Canal Company Ltd v The Environment Agency

A contractual machinery clause is not necessarily subsidiary merely because it facilitates a compensation or valuation provision. The court may substitute machinery where the contract establishes an objectively ascertainable obligation and the machinery is genuinely non-essential. Where the machinery determines the data source, requires specialist judgment and forms part of a prescribed sequence of events, it may be an essential term. The court cannot rewrite the bargain by selecting a site retrospectively or by using historical data where the contract required prior agreement, installation of gauges and subsequent measurements. On an application for summary judgment, the claimant must show a real prospect of success on the pleaded case.

The claimant, which operated the Manchester Ship Canal, sought a declaration that the defendant, as statutory successor to the Mersey River Board, was liable to pay compensation under a 1963 agreement. The compensation mechanism depended on the flow of the River Irwell being measured at a site agreed by the parties’ engineers or determined by arbitration, with gauges to be constructed at that site.

The claimant relied on flooding data from existing gauging sites and argued that agreement could be inferred, reached retrospectively, or replaced by a court or arbitrator. The defendant applied to strike out the claim or obtain summary judgment. The central issues were whether the contractual machinery could be activated retrospectively and whether the court could substitute its own mechanism.

1. Application granted. The claimant had no real prospect of succeeding, and the defendant was entitled to summary judgment.
2. The court considered the pleaded case. The claimant had not pleaded that the parties had agreed the gauging site. In any event, the evidence did not support an inference of agreement. The existence of two pre-existing gauging sites did not show that the parties had agreed to use them, particularly since the agreement required gauges to be constructed at the agreed or determined site.
3. On construction, the court applied the approach in Wood v Capita Insurance Services Ltd, [2017] UKSC 24. The agreement had to be read as a whole, giving effect to its language, context and commercial purpose. Clauses 4, 7 and 8 established a sequence: agreement or determination of the site, construction of gauges contemporaneously with the improvement works, and the taking and recording of measurements.
4. The requirement to agree or determine the site was essential in the circumstances. Unlike Sudbrook Trading Estate Ltd v Eggleton, [1983] 1 AC 444, the court was not being asked to ascertain an objectively fair value. It was being asked to identify the appropriate data source, a task requiring specialist engineering judgment. The court therefore could not substitute its own machinery.
5. Herbert v Doyle, [2010] EWCA Civ 1095, was distinguishable. That case involved a limited choice necessary to prevent a unilateral veto. Here there was no deadlock or breach, the contractual mechanism existed, and the evidence did not establish which site should be selected.
6. A retrospective agreement or arbitration would effectively rewrite the contract. The court could not waive the requirement for an agreed site and new gauges while preserving the compensation provisions and using historical data retrospectively.