Buckinghamshire Council v FCC Buckinghamshire Limited

Under a contractual definition of third party income, deductible costs are limited to costs directly incurred in generating the relevant income. Direct costs are those specifically connected with the particular income-generating activity; general, fixed and indirect overheads are not deductible merely because they support the business.

The contractual provisos must be construed together. Costs may be deductible where they relate specifically and solely to third party income beyond the gate-fee income modelled in the Base Case, but not where they concern operation of, or handling and processing waste at, the contractual facilities. Income bundled into a wider unitary charge remains third party income if it is attributable to waste ultimately treated at the facilities.

The Council and FCC Buckinghamshire Limited were parties to a long-term waste management project agreement providing for the construction and operation of an energy-from-waste facility and waste transfer stations. The agreement required specified third party income to be shared between them after permissible costs had been deducted.

Earlier proceedings determined that income received by FCCB or its affiliates from third party waste, related movement and handling, and metals or other residues was income associated with the project and third party income. FCCB then supplied information and made payments, but the Council disputed the calculation of income and deductible costs.

The principal issues concerned the meaning of directly incurred costs, the three contractual cost provisos, income under Luton’s unitary charge, metals income, the Fortis contract, and the scope of information obligations under clauses 99 and 111.

1. Contract construction. The agreement was construed by applying the objective, unitary approach: the natural and ordinary meaning, the agreement as a whole, its commercial purpose, the admissible factual matrix and commercial common sense were considered iteratively. Commercial common sense could not rewrite the bargain or displace clear wording.
2. Deductible costs. “Directly incurred” required an immediate relationship between the expenditure and the income-generating activity. Direct costs were distinguished from indirect, fixed and overhead costs. The burden lay on FCCB to demonstrate that each claimed cost satisfied the contractual requirements.
3. Cost provisos. The Base Case modelled gate-fee revenue from third party waste. Costs specifically and solely related to income from other sources were capable of deduction. Costs envisaged in the Base Case were principally costs of operating the facilities and specified haulage between them. The prohibition on costs of handling or processing third party waste applied to waste received at the facilities, and did not extend to all handling occurring anywhere before arrival.
4. Individual costs. External haulage and subcontractor costs were deductible in principle. FCCB failed to establish that its broadly apportioned manpower, site, SHE, hire, fuel, maintenance, rent, rates, licensing, depreciation and overhead claims were directly incurred. Notional inter-company allocations were not actual costs directly incurred by the relevant companies.
5. Luton income and metals. An apportioned part of Luton’s unitary charge was third party income because it included income from waste handled and ultimately treated at Greatmoor. The indivisible-payment argument did not defeat the claim. Metals income received by an affiliate was also third party income; any permissible costs remained to be determined.
6. Fortis and information obligations. The Fortis contract was an Off Take Contract for the limited purposes of clause 47.5, but not for the wider confirmation and due-diligence obligations in clauses 47.4, 47.6 and 47.7. The requested general declarations concerning clauses 99 and 111 were refused as too broad and insufficiently precise.
7. The claim therefore succeeded in part. Certain quantification and deductible-cost issues, including Luton-related matters, were deferred for further determination.

The judgment records earlier proceedings between the same parties before O’Farrell J, resulting in the decision reported at [2021] EWHC 2867 (TCC). The present proceedings were issued in August 2022 and were tried in the Manchester TCC. This judgment determined the disputed contractual and accounting issues at first instance, with some quantification and cost issues deferred.