Sale of land – Purchase price – Construction of sale agreement – Site of sewage treatment works sold for construction of new airport terminal – Price payable to claimant vendors to include additional costs of running replacement works – Independent expert to determine “bases of operation” of old and new works – Whether one-off determination required – Whether effect on running costs of future changes in legislation be left open for review – Judgment for claimants
By a 1993 agreement, the first claimant agreed to sell 250 acres of land to the first defendant for the construction of the new terminal 5 at Heathrow airport; the second claimant and second defendant guaranteed the parties’ respective obligations under that agreement. The price payable by the defendants comprised three elements, namely: (i) £3m for the land; (ii) the provision of new sewage treatment works to replace those previously operated by the claimants on the site; and (iii) payment for the “additional costs”, over a period of 30 years from the date of the handover of the new works to the claimants, in running the replacement works over those that would have been incurred in running the existing works. In order to calculate those additional costs, the parties were to attempt to agree the bases on which the existing works would have been operated and the replacement works would be operated during the relevant period, failing which the matter was to be referred to an independent expert. The implementation of those arrangements was delayed by the length of the terminal 5 planning inquiry, but the handover of the new treatment works finally took place in June 2006.
The parties failed to agree the “bases of operation” and therefore resorted to determination by an expert. They referred to the court, under CPR 8, a question as to the role of the expert on such a determination. The claimants contended that the expert should make a one-off determination, which would then enable the parties to calculate the additional costs as an accounting matter. The defendants submitted that although the costs of running the new works could readily be ascertained on a yearly basis over the life of the agreement, an seessment ascertainment of the hypothetical running costs of the old works would need to take into account any changes in legislation or regulation that, by making the rules more stringent would have made the running of those works more expensive. They accordingly sought to distinguish between “bases of operation” and “modes of operation”, arguing that although the expert had to make a one-off determination of the former, he could leave open for subsequent review the hypothetical “mode” of operation to take account of future events.
Held: Judgment was given for the claimants.
In order to determine the amount payable by the defendants, it was necessary to ascertain the difference between the hypothetical costs that would have been incurred in running the old works during the relevant period and the actual costs of running the new works. The purpose of determining the bases of operation of the two sites was to calculate those additional costs. There were no grounds for distinguishing between the hypothetical “basis” of operating the old works during the relevant period and the hypothetical “mode” of operation during the same period. Such a distinction was absent from the contractual language of the clause in question and found no support elsewhere in the agreement. In practical terms, any such distinction was likely to be illusory. Moreover, the agreement contained no mechanism by which any matters remaining for subsequent determination could be determined. The expert appointed to determine the bases of operation under the relevant clause of the agreement was obliged to make a final, once-and-for-all determination and would have no jurisdiction to determine further matters periodically. The absence from the agreement of any mechanism to resolve future disputes over such matters supported the view that they had not been intended to be left open in the first place.
Consequently, the claimants’ construction of the agreement was correct. Although it was for the independent expert to decide which approach to take, whatever approach was adopted was to be a final, once-and-for-all determination. Once the bases of operation were so determined, the parties could agree the resultant costs, with reference to a chartered accountant in the event of dispute, as provided by the agreement. This was a commercially reasonable outcome, minimising the possibility of continuing disputes between the parties over the 30-year lifespan of the agreement.
John McCaughran QC (instructed by Ashurst LLP) appeared for the claimants; Richard Wilmot-Smith QC (instructed by Steptoe & Johnson) appeared for the defendants.
Sally Dobson, barrister
