Judge declares council was entitled to exit 25-year waste processing contract, awards £10m+ in damages

Essex County Council was entitled as at 13 June 2019 to terminate a 25-year contract for the processing of household waste, a High Court judge has ruled.

In Essex County Council v UBB Waste (Essex) Ltd [2020] EWHC 1581 (TCC) Mr Justice Pepperall did not however grant wider declaratory relief that the local authority remains entitled to terminate the contract.

Essex had entered into the contract with UBB on 31 May 2012 for the design, construction, financing, commissioning, operation and maintenance of a mechanical biological waste treatment (“MBT”) plant in Basildon.

The Tovi Eco Park facility was built and on 25 November 2014 it was certified as having passed the ‘Readiness Tests’. The facility then entered the Commissioning Period and was required to pass the ‘Acceptance Tests’ before the extended Planned Services Commencement Date of 12 July 2015.

Mr Justice Pepperall said it was common ground that the facility had not passed the Acceptance Tests either by such date or by the Acceptance Longstop Date of 12 January 2017.

Essex argued that UBB failed to design and construct the facility so that it was capable of passing the Acceptance Tests.

It contended that the defendant’s failure either to pass the Acceptance Tests or to attempt to do so by the Acceptance Longstop Date was an event of Contractor Default and sought, among other relief, damages and a declaration that it was entitled to terminate the contract pursuant to clause 67 of the contract.

UBB, which is a joint venture company incorporated by Urbaser Limited and Balfour Beatty Investments Limited, denied any default.

It argued that, upon the true construction of the agreement, the facility was capable of passing the Acceptance Tests and that Essex was wrong not to recognise the Quasi-Acceptance Tests as evidence of the same.

Further, UBB contended that the performance of the facility was critically dependent on the composition of the waste. It argued that the facility would have passed the Acceptance Tests and would now be in the Services Period but for the local authority’s failures to:

1. provide waste with the assumed composition provided to UBB when bidding for the contract;
2. approve the use of modifications made to the plant referred to compendiously by the parties as the Quick SRF or (“QSRF”) Line; and
3. engage properly with UBB in the Options Review process to deal with the composition issues by agreeing necessary modifications to the Acceptance Tests.

In addition, UBB argued that it was entitled to an extension of time for passing such modified Acceptance Tests.

Accordingly, UBB denied that Essex was entitled to terminate the contract. It argued that the authority was itself in breach of contract and sought damages in excess of £77m as well as declaratory and injunctive relief.

This was, UBB submitted, “termination for convenience dressed up as termination for contractor default.”

Finally, UBB also claimed compensation in respect of the temporary cessation of deliveries in February 2017 following the discovery of suspected asbestos-containing materials at the facility.

The judge said that while the principal issues could be shortly stated, the arguments were “complex and the documents voluminous”.

He heard the case over 25 days in May/June 2019 during which ten lay witnesses and six experts gave oral evidence. In addition, he was asked to consider reports from a further two experts. He had been provided with 1,775 pages of argument and 121 authorities spanning a further 5,100 pages, and he heard counsel between their opening and closing submissions over six days.

Mr Justice Pepperall said that “standing back from the trees, the shape of the wood can be clearly seen”. He concluded that:

1. The fundamental problem with this project was that UBB made a number of serious design errors:

a. Its density assumptions were based on little more than calculations on the back of the proverbial fag pack such that the biohalls were seriously undersized and incapable of processing the guaranteed tonnage of waste.

b. Its bid in respect of BMW [biodegradable municipal waste] reduction was inadequately researched, ambitious and set with a view to scoring well in the procurement exercise. It has not been achievable.

c. Its confidence that it could accept the composition risk and meet the performance guarantees notwithstanding significant variations in the waste proved to be misplaced.

2. UBB therefore designed and built a facility that simply could not pass the Acceptance Tests.

3. The QSRF Line was not introduced to add additional functionality but in an attempt to get around the density problem.

4. It is true to say that the facility produces good quality SRF and that it has succeeded in diverting very significant tonnages of waste away from landfill. That said:

a. It does not process the guaranteed tonnage of waste.

b. It produces rather more SRF and QSRF than it would if it met the performance guarantees for Recovery and Recyclates.

c. It fails to meet the key environmental standard for BMW reduction such that, if the facility were ever switched to Bio-Stabilisation Mode, the SOM [stabilised output material] produced would not meet the contractual standard.

5. Once UBB’s failings became clear in late 2015, it is hopeless to suggest that the Authority was under a contractual obligation to agree fundamental changes to the contract and the Acceptance Tests in order to keep the project on track.

6. The Authority explored radical proposals including the mass diversion of waste and the acceptance of QSRF as an alternative output, substitution of BMc for an alternative method of testing and even the complete removal of the BMW reduction requirement. Ultimately, however, the Authority’s hands were tied by DEFRA’s stance in respect of WIC [Waste Infrastructure Credits] funding and a perfectly reasonable political direction that officers should not compromise on environmental standards.

7. Whatever the changes in the financial and political landscape since the Authority initially procured the facility, it is nonsense to suggest that termination on the basis of UBB’s failure to pass the Acceptance Tests would be termination for convenience dressed up as termination for Contractor Default. The allegations that the Authority failed to act in good faith in its attempts to negotiate a solution and in its approach to termination are without foundation.

8. The dispute became complicated when UBB seized on the lower levels of BMW putrescible waste recorded in the first two quarters of 2016. Any Composition Issue did not, however, arise until at least Q4 2016 and there was no contractual basis for the Impact & Remedy Reports issued in March and June 2016. Therefore, the Authority was not in breach of contract in failing to participate in an Options Review in 2016, there was no Compensation Event in respect of such failure or the Authority’s conduct of the Options Review and, in any event, there was no direct causal link between any alleged Compensation Event and UBB’s failure to achieve Service Commencement.

9. The Authority accepted the contractual risk of interruption to the supply of waste to the facility. There was therefore a Compensation Event in early 2017 when waste deliveries were suspended during the asbestos scare.

The judge awarded the local authority damages in the agreed sums of £9,038,428 to the end of February 2019 and continuing losses thereafter at £99,563 per month.

Mr Justice Pepperall did however find that UBB was entitled to compensation pursuant to clause 39 of the contract in the sum of £745,234 in relation to the asbestos matter, which he considered to be a Compensation Event.

Cllr Simon Walsh, Essex County Council Cabinet Member for Environment and Climate Change Action said: “We are pleased that the judge supported our position that the issues at Tovi Eco Park are due to the original design and build of the plant.

“During the commissioning period we were aware that UBB was experiencing plant performance and process issues and worked closely with the owner to attempt to resolve these. Unfortunately, the contractor was unable to resolve these to our satisfaction and we referred the matter to the High Court for resolution, as part of the process laid out in the contract.

“We are delighted that the judge’s decision was in our favour and will now take stock and consider our options going forward.”

Cllr Walsh added: “This result does not affect the collection of household waste across the county which will continue as normal.”

“Since it began operating in 2014, the facility has been receiving and processing a considerable amount of the county’s residual (black bag) waste.

“While next steps are being considered, household waste will continue to be collected across the county and disposed of appropriately.”

City law firm Slaughter and May acted for Essex, instructing Marcus Taverner QC, Piers Stansfield QC and Paul Buckingham of Keating Chambers and Daniel Churcher of 4 Pump Court.

A spokesperson for Balfour Beatty said: “Balfour Beatty is one of two shareholders in UBB Waste (Essex) Limited, the project company & defendant in the Essex litigation. We note the judgment handed down by the Court.

“Balfour Beatty and the project company are studying the judgment and considering possible next steps. As such, it would be inappropriate to comment further at this time.”