Essex County Council v UBB Waste (Essex) Ltd (Rev 1)

A long-term PFI contract may be a relational contract, but an implied duty of good faith cannot contradict detailed express provisions or require a party to surrender a negotiated contractual benefit. Contractual acceptance tests must be applied according to their express terms, including requirements to test different operating modes. Approval of facility modifications does not relieve the contractor from performance obligations or planning requirements. The waste hierarchy is flexible and permits reasonable departures justified by the best overall environmental outcome. A contractual right to terminate is not subject to an automatic promptness requirement, although it may be lost by clear waiver by election. Where a contract treats deliberate diversion of waste as a compensation event, liability turns on intentional diversion rather than blameworthiness.

Essex County Council contracted with UBB Waste (Essex) Ltd for the design, construction and operation of a mechanical biological waste-treatment facility. The facility failed to obtain an Acceptance Test Certificate by the contractual longstop date. UBB alleged design and performance issues were caused or aggravated by waste composition, the Authority’s refusal to approve or accommodate modifications, and the suspension of waste deliveries during an asbestos scare. The Authority sought declarations, damages and confirmation of its contractual right to terminate. UBB counterclaimed for declarations, compensation and an extension of time. The principal issues concerned contractual construction, implied duties of good faith and co-operation, the operation of acceptance tests, planning permission, composition testing, termination and compensation events.

1. Acceptance tests. The contract required the facility to pass the Acceptance Tests in both Bio-Stabilisation Mode and SRF Mode. The facility had to satisfy the Throughput, Recovery, BMW reduction, Recyclate and SRF quality requirements in accordance with the contractual method statements. The QSRF bypass could not be counted towards the contractual Throughput Test because the test concerned waste fed into the pre-processing module and the bio-stabilisation line. The original facility could not pass the Throughput or BMW reduction tests. The modified facility could not pass the Throughput, Recovery or BMW reduction tests even if the QSRF line were operated.
2. Good faith and relational contract. The 25-year PFI contract was a paradigm relational contract and contained an implied duty of good faith. The duty was objective and context-sensitive. Dishonesty was sufficient but not necessary; the question was whether conduct was commercially unacceptable to reasonable and honest people. The duty could not require the Authority to abandon expressly negotiated performance standards, agree to replace the BMc test without adequate safeguards, or accept modifications that undermined the express testing regime.
3. Discretion and modifications. The Authority was entitled to insist on testing in both modes and to reject modifications which would have a detrimental effect on the performance guarantees. Approval under schedule 9 required UBB to implement approved modifications but did not relieve it of its contractual obligations. The QSRF modifications involving mass diversion of waste breached planning condition 2 and could not be operated without revised planning permission. Modifications 3, 4 and 5 were contractually permitted, subject to the planning position.
4. Composition and compensation. Composition results had to be assessed using the rolling annual average. An Impact and Remedy Report was not triggered merely because raw quarterly data fell below the Band A threshold. The waste did not fall into Band B until the fourth quarter of 2016. The Authority was not then in breach for failing to conduct an earlier Options Review, and UBB failed to establish causation between any composition issue and its inability to pass the tests.
5. Termination and asbestos diversion. There was no implied term requiring prompt exercise of the right to terminate for failure to obtain the Acceptance Test Certificate. The right could nevertheless be lost by clear waiver by election. It had not been lost while the facility remained incapable of passing the tests. The Authority was entitled to terminate as at 13 June 2019. Under clause 21.2.5, wilfully allowing diversion meant an intentional or deliberate act, without a requirement of blameworthiness. The Authority had not wilfully directed diversion but had wilfully allowed it by taking no action to persuade its contractor to continue deliveries. UBB was entitled to £745,234 compensation for the asbestos-related interruption. The Authority was awarded £9,038,428 damages for unauthorised QSRF operation, with continuing losses of £99,563 per month.