Citation: [2025] EWCA Civ 921
This appeal arose from a long-term waste management contract entered into between Buckinghamshire Council (“the Council”) and FCC Buckinghamshire Limited (“FCCB”).
Under the contract, FCCB was required to build a waste-to-energy facility at Lower Greatmoor Farm, Buckinghamshire (“Greatmoor”). Thereafter, FCCB was required to dispose of the Council’s waste at Greatmoor and also allowed to use excess capacity at Greatmoor to handle waste from third parties. Where it obtained income from third parties that was “associated with the Project” (defined under the contract as “Third Party Income”), FCCB was required to share a portion of that income with the Council, subject to its right to deduct costs that were “directly incurred” in generating the income and that met the requirements of three further contractual provisos.
In an earlier set of proceedings ([2021] EWHC 2867 (TCC)), the Council established that Third Party Income included income received by FCC affiliates from the North London Waste Authority and Hertfordshire County Council for handling waste that was disposed of at Greatmoor. O’Farrell J held that the contractual definition of Third Party Income was “capable of extending to income from ancillary activities of collecting waste at a site remote from [Greatmoor] and transporting it to [Greatmoor] for the purpose of treatment and disposal” and “extends to all income arising from waste that is ultimately received at [Greatmoor], regardless of the point in time at which the sums from which the income is derived become payable.” That decision had not been challenged by way of appeal.
This was therefore the second set of proceedings between the parties in relation to the contract. The current dispute concerned (amongst other things):
- whether FCCB was entitled to deduct certain costs from Third Party Income shared with the Council (ie whether such costs were “directly incurred” and met the three provisos); and
- whether a unitary change that an FCC affiliate received from Luton Borough Council was Third Party Income and so fell to be shared with the Council, on the grounds that some of Luton’s waste was disposed of at Greatmoor and the income was for that reason “associated with the Project”.
At first instance ([2024] EWHC 1552 (TCC)), HHJ Stephen Davies found that:
- FCCB was entitled to deduct its haulage costs from income shared with the Council but had not established that any of its other costs were “directly incurred” in generating that income; and
- a proportion of the unitary charge that FCCB received from Luton (ie the proportion that was referable to the tonnage of waste sent to Greatmoor) was “associated with the Project” and therefore constituted Third Party Income to be shared with the Council.
Both parties appealed.
FCCB contended that (i) the Judge had misconstrued the phrase “directly incurred” and all FCCB’s costs met that requirement and so were deductible; (ii) the unitary charge received from Luton was not Third Party Income; and (iii) the Judge misdirected himself on the burden of proof.
The Council contended (amongst other things) that the Judge misconstrued proviso (c) under the contract, which prevented FCCB from deducting the costs of “handling or processing Third Party Waste”. The Judge found that this proviso only prevented FCCB from deducting the costs of handling or processing waste at Greatmoor (or the other facility constructed under the contract). The Council contended that proviso (c) was not so limited, and prevented FCCB from deducting any waste handling and processing costs, including haulage costs.
In the Court of Appeal, Newey LJ, Jeremy Baker LJ and Sir Launcelot Henderson unanimously dismissed FCCB’s appeal and allowed the Council’s appeal.
- The Judge correctly construed the words “directly incurred”. As the Judge had found, this phrase required “some immediate relationship between the winning of the income and the outlay”, as opposed to “those costs that are not specifically incurred in relation to that activity but are the general costs incurred by the organisation as part and parcel of undertaking its activities as a whole.”
- The unitary charge received from Luton was “associated with the Project” and so fell within the definition Third Party Income. The Court referred in this regard to the decision of O’Farrell J that Third Party Income included “income from ancillary activities of collecting waste at a site remote from [Greatmoor] and transporting it to [Greatmoor] for the purpose of treatment and disposal”. The Luton unitary charge fell within that description.
- The Judge had correctly directed himself on the burden of proof.
- Proviso (c) prevented FCCB from deducting handling and processing costs away from Greatmoor, and therefore FCCB was not entitled to deduct haulage costs from Third Party Income.
The appeal turned on the interpretation of bespoke contractual provisions against a fact pattern that will not be repeated. For construction practitioners, its chief interest is likely to lie in the Court’s consideration of the phase “directly incurred” and the concept of “direct costs”, these concepts being frequently engaged in construction contracts and disputes. Nevertheless, caution should be exercised when trying to transpose the Court’s reasoning about the wording of one particular contract on to different contractual provisions. Whatever its wider import, the case was of considerable importance to the Council and represented a major victory.
The Council was represented by Justin Mort KC, John McMillan, and Tom Coulson (with Justin and Tom having also appeared in the case at first instance).
A link to the judgment is here.
