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

The Judgment

In paragraph 199 of the Judgment, the Judge accepted a submission that the need for costs to be “directly incurred” “imposes a requirement that there must be some immediate relationship between the winning of the income and the outlay”. Expanding on that somewhat in paragraph 203, the Judge said that:

there is an obvious distinction between direct costs on the one hand and what may be described either as indirect or fixed costs or as overheads on the other hand; and (ii) the dividing line lies between those costs which are incurred specifically in relation to the particular income generating activity in question and those costs which 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 Judge did not accept that such an interpretation offended against common sense: see paragraph 210 of the Judgment. The Judge had explained in paragraph 208:

“there is an important and obvious difference between direct and indirect costs. The former are costs incurred directly in order to generate the income in question, whereas the latter are costs incurred by the business as a whole and are, by definition, incurred whether or not any particular or specific income is generated. Thus, the extent to which FCC would suffer a true loss in such circumstances, as opposed to the loss of an opportunity to make a contribution to indirect costs, would depend on a number of factors which might vary considerably at any particular time. Also, unless FCC had actually scaled up its costs of operating a particular facility or service in order to deal with the [Third Party Waste] in question, it would not have incurred any actual excess expenditure on these fixed costs. If it was unable to recover a proportion of these fixed costs from [the Council] then it would, of course, have to recover them from existing income. However, that is not the same as saying that it would make a loss. In a case such as the present, that would also depend on whether, and if so to what extent, FCC had already recovered some or all of its fixed costs through the guaranteed income.”

With regard to the burden of proof, the Judge said in paragraph 101 of the Judgment:

“The question of the burden of proof arises in relation to this overall requirement [viz. that costs must be ‘directly incurred’] as well as to the three provisos. In my judgment this is a sterile argument. At the most basic level it is trite law that [the Council] as claimant bears the burden of proving that it is entitled to the monetary and other relief which it seeks. Under the terms of the [Project Agreement], it is apparent that as between [the Council] and FCCB it is the latter which has sole knowledge as to: (i) what [Third Party Income] has been generated; (ii) what costs have been incurred; (c) whether those costs have been directly incurred and fall within each of the three provisos. It would be a rare outcome, after a trial where the parties have been able to adduce documentary evidence, call and cross-examine witnesses and make full submissions, to make a decision on the basis of a failure by one party to satisfy a burden of proof. That does not arise in this case. It is only necessary to say that it is obvious from the clear wording that the burden is on FCCB to demonstrate (prove) that each of the three provisos is met in relation to any individual cost item.”

Turning to the application of the requirement that costs be “directly incurred”, the Judge said in paragraph 246 of the Judgment that “the haulage and other sub-contractor costs which FCC has sought to deduct” “plainly fall within the definition of directly incurred costs”. However, the Judge did not accept that any of the other costs which FCCB claimed to deduct had been shown to have been “directly incurred” as he understood those words. He thus held that FCCB was not entitled to make deductions as it had claimed in respect of manpower, site costs, “SHE” (i.e. safety, health and environmental) costs, hire costs, fuel plant repair and maintenance, fixed rent rates and licensing, site overheads, depreciation, divisional overhead, corporate overheads or “operational support charge”.

With regard to manpower, the Judge observed in paragraph 249 of the Judgment that it was “possible” that some of the manpower costs “might individually fall within the definition of directly incurred costs” but, FCCB having “taken the approach of identifying the overall manpower costs incurred by the individual facility (also referred to as a cost centre) and then apportioning that overall figure to the [Project Agreement] by reference to the percentage of waste sent by that facility to Greatmoor relative to the overall waste handled at that facility”, it was “simply not possible to identify specific manpower costs which might individually fall within the definition”: see paragraphs 248 and 249. “[I]n the circumstances of the case and the light of the evidence advanced by FCC”, the Judge said in paragraph 252, “it is not possible to find in its favour on its pleaded and evidenced case”, with the result that “nothing can be deducted by way of costs in relation to the years the subject of this case”. The Judge went on to say that that was “a consequence of FCC’s decision to adopt an all-or-nothing approach and to include every possible category of manpower related cost into this cost item”.