Case Nos: CA-2024-002136 - [2025] EWCA Civ 921

FCCB’s case

It is FCCB’s case that the words “directly incurred” should have been construed by focusing on the question whether the income which FCCB was required to share could have been generated without the costs which it sought to deduct being incurred. Ms Fiona Parkin KC, who appeared for FCCB with Mr Zulfikar Khayum and Mr Samar Abbas Kazmi, argued that costs are deductible if the relevant income could not otherwise have been achieved. What is required, so Ms Parkin said, is a causal connection.

That view, Ms Parkin suggested, is reinforced by the fact that there could never be “scaling up” such as the Judge contemplated in relation to arrangements such as that agreed between FCCWS and Hertfordshire CC, yet the parties would have intended costs to be deductible in such a case. Ms Parkin said that the Judge was in effect reading “costs directly incurred” as “direct costs directly incurred” when the definition does not speak of “direct costs”. Further, the Judge, so Ms Parkin contended, failed to have regard either to the “Invitation to Submit Detailed Proposals” (“the Invitation”) which had led on to the Project Agreement or to certain documents mentioned in the Invitation.

The Invitation itself, which was apparently issued in December 2007, had said in paragraph 21.3.1.3(c):

“Any income sharing proposals should recognise the Council’s risk position, and have regard to state aid implications. Note that it is recognised that whilst the Council would expect to benefit from income generated by the facility on a basis consistent with the risks borne by the Council as funder, clearly the operator also needs to be incentivised and reap the benefits of its efforts.”

The Invitation had also stated that bidders must include in their proposals “[a]n output specification and payment mechanism following WIDP draft consultation guidance” (paragraph 19.5); that, if funded through “Prudential Borrowing”, “the risk profile of the project … should not differ substantially from a PPP/PFI SOPC” (paragraph 21.3.5); and that the draft agreement which a bidder was to supply “should … be SOPC 4 compliant in every respect which is applicable” (paragraph 22.1.1). The Invitation explained that “WIDP” referred to “Waste Implementation Development Programme, DEFRA’s Council support programme which supports new waste disposal infrastructure”, while “SoPC4” was “HM Treasury’s Standardisation of PFI Contracts version 4 (27th March 2007)”. SoPC4 stated in relation to projects being financed on a project finance basis that the structuring should be on the basis that “the Unitary Charge is fixed at Financial Close and thereafter changes only for agreed indexation, value testing, Change of Law, Service Change or upon the occurrence of a Compensation Event” and “does not increase for Contractor delay or failure or for Contractor under-estimation of the actual outturn cost of delivery of the Services”: see paragraph 35.1.1. In July 2008, the WIDP “Payment Mechanism Principles” were formalised in the publication “Waste Infrastructure Delivery Programme Residual Waste Procurement Pack Module 4 Part I” and “Part II: Payment Mechanism Drafting”. The former referred to “the Authority … shar[ing] in net revenues from specific process outputs where the revenue exceeds an agreed pre-defined threshold” (paragraph 2.62.), to the revenue shared being “net of additional marginal costs incurred by the Contractor in generating the additional income” (paragraph 2.6.2) and to “[a]ny income not included in the base case financial model that is subject to sharing” being “shared after netting off additional marginal costs (i.e. those not shown in the model) incurred by the Contractor in developing the additional income” (paragraph 2.6.3). “Part II: Payment Mechanism Drafting” included a proposed definition of “Third Party Income” in these terms:

“the Contractor’s [and/or sub-contractor’s] income from third parties (other than the Authority under the Contract) associated with the Project including without limitation that derived from the sale of [ ] [(less the marginal costs of generating such income]”.

Ms Parkin submitted that both the Invitation and the other documents conveyed the message that the successful bidder needed to derive benefit from finding Third Party Waste, but the Judge’s construction of “directly incurred” negated that. It served to discourage FCCB from generating Third Party Income and failed to achieve a commercially balanced result.