Hampshire County Council v Beazer Homes Ltd [2010] EWHC 3095 (QB) (29 November 2010)

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England and Wales High Court (Queen's Bench Division) Decisions

You are here: BAILII >> Databases >> England and Wales High Court (Queen's Bench Division) Decisions >> Hampshire County Council v Beazer Homes Ltd [2010] EWHC 3095 (QB) (29 November 2010)
URL: http://www.bailii.org/ew/cases/EWHC/QB/2010/3095.html
Cite as: [2011] PTSR D8, [2010] EWHC 3095 (QB)

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		Neutral Citation Number: [2010] EWHC 3095 (QB)
		Case No: HQ10X00160

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

29/11/2010

B e f o r e :

THE HON. MRS JUSTICE SWIFT DBE
____________________

Between:

	IN THE MATTER OF a claim for a declaration as to the meaning of an agreement made under section 106 of the Town and Country Planning Act 1990 AND IN THE MATTER OF a claim under CPR Part 8 Hampshire County Council	Claimant
	- and -
	Beazer Homes Ltd	Defendant

____________________

Peter Village QC and James Strachan (instructed by the Chief Executive, Hampshire County Council) for the Claimant
Richard Phillips QC and Jeremy Phillips (instructed by Davies Arnold Cooper LLP) for the Defendant
Hearing dates: 12 – 13 October 2010
____________________

HTML VERSION OF JUDGMENT
____________________

The Hon. Mrs Justice Swift DBE :

Introduction

This is a claim made by the claimant under CPR Part 8 for declaratory relief as to the proper interpretation and effect of certain clauses of a legal Agreement made under Section 106 of the Town and Country Planning Act 1990 (the 1990 Act). The original Agreement, which was dated 30 April 1997, was later amended by Deed of Variation dated 29 September 1999. The amendments to the Agreement were not material for the purposes of this case. I shall refer throughout this judgment to the amended Agreement, which I shall term "the Section 106 Agreement" or "the Agreement".

The defendant makes a counterclaim for declaratory relief as to the interpretation and effect of the Agreement.

The parties

The claimant is a County Council and is, inter alia, the highway authority for Hampshire. The defendant is a national house builder and recently undertook a major development project on land known as Railroad Heath, situated at Fleet, in Hampshire.

The development project

The development project included the construction of 1,700 homes, together with a primary school, a shopping centre, a community centre and amenities such as playing fields, a sports pavilion, a nature reserve and open spaces. It included provision for land on which to build a railway station and for the construction of a distributor road and the necessary vehicular access. The scale of the development has resulted in a significant expansion of the town of Fleet. On 30 April 1997, Hart District Council, the planning authority for Fleet, granted outline planning permission for the development.

The Section 106 Agreement

As is customary with large-scale developments, the grant of the outline planning permission was subject to a number of conditions to be fulfilled by the owner of the land on which the development was to take place. It was subject also to a number of planning obligations which were the subject of a Section 106 Agreement.

In essence, planning obligations which are the subject of a Section 106 Agreement are intended to enhance the quality of a development and/or to eliminate - or at least ameliorate - some of the undesirable impacts on infrastructure, public services and the environment that might otherwise result from the development. An agreement by a developer to undertake such planning obligations may result in the granting by a planning authority of planning permission for a development in circumstances where, without such agreement, planning permission would have been refused. A common type of planning obligation is an agreement that the developer will fund or contribute to the cost of highway works necessitated by the additional traffic which will be generated as a result of the development.

The parties to the original Section 106 Agreement in this case were the trustees of the Elvetham Estate (as owners of the land on which the development was to take place), Hart District Council (as the local planning authority) and the claimant (as, inter alia, the relevant highway authority). By 1999, when the Deed of Variation was signed, the defendant had acquired ownership of the land and this was reflected in the amendments to the Section 106 Agreement, to which the defendant was a signatory. It is not disputed that responsibility for fulfilling the various planning obligations contained within the Section 106 Agreement lay with the defendant.

The obligations under the Section 106 Agreement

The Section 106 Agreement required the defendant to make financial contributions to the claimant towards the cost of various highway works, schemes and/or improvements which the claimant intended to undertake as a result of the development. The relevant planning obligations were set out at Clause 4.14 and 4.16 of the Agreement.

By Clause 4.14, the defendant covenanted to make a financial contribution towards traffic management measures and improvements to a highway known as Cove Road, which was situated close to the development site. Clause 4.14 provided that the defendant agreed:

"To pay to [the claimant] on occupation of 350 dwellings the sum of £125,000 as a contribution towards traffic management measures in the vicinity of the Development Site and improvements to Cove Road and for no other purpose".

By Clause 4.16, the defendant covenanted to make financial contributions towards the construction of the Fleet Inner Relief Road, the plans for which had been the subject of discussion and negotiation between the parties. Clause 4.16.1 provided that the defendant agreed:

"(A) To pay to [the claimant] within 14 days of Implementation [a term defined elsewhere in the Agreement] the sum of £200,000 as a first instalment of a contribution towards the Fleet Inner Relief Road ("the Contribution").

(B) To pay to [the claimant] within two years of Implementation the sum of £900,000 as a second instalment of the Contribution.

(C) To pay to [the claimant] within three years of Implementation the sum of £500,000 as a third instalment of the Contribution.".

The financial contributions payable pursuant to Clauses 4.14 and 4.16.1 were to be indexed according to an agreed formula.

It is clear that, at the time the Section 106 Agreement was made, the parties contemplated the possibility that the claimant might decide not to build the Fleet Inner Relief Road. Clause 4.16.2 provided for this possibility. It stated that:

"(A) At any time prior to the completion of the Development [the claimant] may elect to use the Contribution or any part thereof towards such alternative transportation improvements in Fleet as [the claimant] considers to be of benefit to the public ("the alternative schemes") and [the claimant] shall account to [the defendant] for the cost of the alternative schemes PROVIDED THAT in any event the Contribution shall only be used for the Fleet Inner Relief Road or the alternative schemes and no other purpose."

Clause 4.16.2 (B) provided for the possibility that the Fleet Inner Relief Road project might for some reason be delayed or not pursued. It stated that:

"In the event of works on the Fleet Inner Relief Road not being commenced before the occupation of 1700 dwellings the Contribution paid by [the defendant] shall be refunded save for any part of the Contribution which may have been expended on the alternative schemes."

Clause 4.16.2 (C) conferred on the defendant the right to the refund of any monies which were left unexpended after the completion of the Fleet Inner Relief Road or any schemes undertaken as an alternative thereto. It provided that:

"[The claimant] shall following the completion of the Fleet Inner Relief Road or the alternative schemes as the case may be provide to [the defendant] such evidence of sums expended as [the defendant] may reasonable require and shall forthwith refund any unexpended balance of the Contribution to [the defendant]".

It is the interpretation and effect of Clause 4.14 and 4.16 that is in issue in this case.

The progress of the development

Implementation of the development project began in October 1999. In that month, the defendant paid the first instalment of £249,323 (i.e. £200,000 indexed) pursuant to Clause 4.16.1. The first residents moved into their homes on the development site in May 2000. In November 2001, the 350^thhome was occupied. That same month, the second instalment under Clause 4.16.1, amounting to £1,224,553 (i.e. £900,000 indexed), was paid by the defendant and the defendant also paid its contribution of £170,077 (£125,000 indexed) pursuant to Clause 4.14. In November 2002, the third instalment of £757,246.65 (£500,000 indexed) was paid by the defendant. That brought the total contributions made by the defendant to £2,231,122.65 (under Clause 4.16.1) and £170,077 (under Clause 4.14). In January 2003, the 750^th home on the development was occupied. In November 2006, the development was completed when the 1,700^th home was occupied.

The highway works

The work on traffic management measures and improvements to Cove Road which had been contemplated by Clause 4.14 of the Section 106 Agreement was undertaken by the claimant and was funded using the contribution paid by the defendant pursuant to Clause 4.14 of the Agreement.

Having considered various options, the claimant eventually decided not to proceed with construction of the Fleet Inner Relief Road. Instead, it chose to undertake, by way of "alternative schemes" as contemplated by Clause 4.16.2(A), a number of improvements to the road transport system in Fleet town centre. In 2002-2003, there was a dispute between the parties about the alternative schemes proposed by the claimant. Having seen information about the proposed schemes, the defendant was concerned that the claimant intended to spend all or part of its contributions under Clause 4.16.1 for purposes other than those specified in that Clause. Particular concern was expressed about various environmental improvements which had been proposed and which the defendant contended did not fall within the scope of "alternative transportation improvements" as specified in Clause 4.16. The defendant threatened to seek a judicial review of the claimant's decision to undertake the proposed schemes on the grounds that it was acting ultra vires. In the event, however, the claimant withdrew its proposals to use part of the defendant's contributions to fund environmental improvements and, whatever the defendant's remaining reservations about the remainder of the proposed schemes, it did not take any legal steps to challenge them. The town centre works duly went ahead and were completed.

The continuing dispute between the parties

In February 2007, following completion of the development, the defendant requested from the claimant details of how its financial contributions made under Clauses 4.14 and 4.16 had been spent. A lengthy exchange of correspondence followed, in the course of which the claimant provided to the defendant a large quantity of documentation relating to its expenditure of the defendant's financial contributions.

In the course of correspondence, the defendant challenged a number of items of expenditure which had appeared in the claimant's documentation. It contended that some items of expenditure had not been reasonably or properly incurred and that some items had not been "expended" at all. It contended that, as a result, it was entitled to significant sums by way of refund under Clause 4.14 and 4.16.

The defendant also expressed dissatisfaction with the claimant's response to its requests for further explanation and justification of its expenditure. The defendant contended (and continues to contend) that the documents that have been provided by the claimant are not adequate to explain and justify the work that has been carried out using its financial contributions.

In August 2008, a meeting took place between the parties at which they discussed the issues between them. Shortly after the meeting, the claimant made a refund in the sum of £137,521 (i.e. £127,486.54 plus interest) from the contributions paid by the defendant under Clause 4.16. However, a number of issues still remained unresolved between the parties.

The defendant then proposed that the parties should refer the outstanding issues between them to an independent expert for determination, pursuant to Clause 10 of the Section 106 Agreement. Clause 10.2 provided:

"10.2 Without prejudice to the other rights of [the defendant] where any dispute or difference shall arise between the parties to this Deed regarding any matter referred to herein any party to such dispute or difference shall be entitled to have the matter referred to the determination of an expert planning and development surveyor ("the appointed expert") having not less than ten years' relevant experience in the field of the matter in dispute and being a member of the Royal Institute of Chartered Surveyors [RICS] the identity of such person in default of agreement being an appointment made on the application of any party to such dispute at any time by or on behalf of the President for the time being of the Royal Institution of Chartered Surveyors."

The referral of a dispute to the appointed expert was however made subject to an important limitation set out in Clause 10.1:

"10.1 The provisions of this clause do not relate to any dispute or difference arising in connection with any matter covered by this Deed to the extent that the same is a dispute or difference as to a matter of law or concerning the interpretation of this Deed ..."

During the early part of 2009, efforts were made by the parties to agree on a suitable expert to be appointed under Clause 10. Those efforts having failed, the defendant applied to the RICS for an expert to be appointed. Meanwhile, in April 2009, the claimant made a further refund in the sum of £58,930.32 (£54,399.01 plus interest) in respect of the defendant's financial contributions pursuant to Clause 4.16. However, the defendant still maintained that it was entitled to further sums by way of refund.

An expert was duly appointed. A hearing before him was arranged for 18 November 2009. In preparation for the hearing, the appointed expert called for written submissions from the parties. In its preliminary submissions, the claimant suggested that the defendant was seeking to widen the ambit of the dispute between the parties so as to include issues of legal interpretation which were specifically excluded from the Clause 10 procedure. The claimant reserved its right to contest issues relating to the legal effect and interpretation of the Section 106 Agreement in the courts if necessary. In its response to the claimant's submissions, the defendant contended that the matters of interpretation referred to by the claimant were irrelevant to the issues to be determined by the appointed expert.

Thereafter, there was correspondence between the parties and the appointed expert which disclosed a fundamental disagreement between the parties as to the ambit of the issues to be determined by the appointed expert. In the event, the claimant requested, and was granted, a stay of the hearing before the appointed expert pending determination by this court of the claimant's proposed application for declaratory relief. On the day appointed for the hearing before the appointed expert, he discussed with the parties their respective positions in relation to the further sums that the defendant was contending should be refunded by the claimant. Those discussions resulted in an agreement by the claimant to refund to the defendant a further sum of £9,406.51 (£8,570.41 plus interest) from the financial contribution made by the defendant pursuant to Clause 4.14.

The proceedings

The claim form was issued on 15 January 2010. The defendant filed a Defence and Counterclaim on 29 January 2010. On 16 February 2010, the claimant served a Reply and Defence to the Counterclaim, followed, on 3 March 2010, by a Part 18 Request for Further Information. The defendant filed and served Replies to that Request on 24 March 2010. In its Defence and Counterclaim the defendant had contended that no fundamental dispute of law or interpretation between the parties existed, as a result of which declaratory relief was unnecessary and all the issues in dispute between the parties could properly be determined by the appointed expert. However, in its Replies to the claimant's Request for Further Information, the defendant indicated that it no longer intended to contend that there was no dispute as to a matter of law and/or interpretation which required a declaration from the court. It indicated its intention, if necessary, to seek to amend the Defence and Counterclaim to reflect the change in its case. At the outset of the hearing before me, no amended Defence and Counterclaim had been filed. I therefore ordered that an Amended Defence and Counterclaim should be filed and served forthwith. That was done on 13 October 2010.

The defendant's complaints summarised

The defendant made a number of complaints about the claimant's expenditure of the financial contributions made under the Section 106 Agreement and about what it alleged was the inadequate information about that expenditure which has been provided. Those complaints can be summarised thus:

a) The amount of the defendant's financial contributions expended by the claimant on experts' fees and administrative costs in connection with both the Clause 4.14 and the Clause 4.16 works was unreasonable, disproportionate to the overall cost of the works and excessive by reference to the standards prevailing in industry, as well as being greatly in excess of the claimant's own earlier estimates;

b) In particular, the amount of the financial contributions used by the claimant to pay internal costs (namely the salaries of the claimant's own employees and other internal administrative expenses) was unreasonable, disproportionate to the overall cost of the works and excessive. Furthermore, it was wrong in principle for the claimant to use financial contributions made under a Section 106 Agreement to defray its own internal costs.

c) Certain items of expenditure related to sums which had not actually been paid out (although the claimant had entered into commitments to pay the sums to third parties) by the date when the 1,700^th home was occupied and had not therefore been "expended" at that time. Those sums should have been refunded to the defendant;

d) In the case of some items of expenditure, the information provided by the claimant was still not adequate to enable the defendant to assess whether the relevant expenditure had been reasonably and properly incurred and whether it had been proportionate and used for the purposes specified in the Section 106 Agreement.

It should be noted that, despite these complaints, the defendant did not go so far as to make any specific allegation that the claimant had acted in bad faith or that (even in relation to monies defrayed on internal salaries and expenses) the claimant had applied the defendant's financial contributions for purposes other than those specified in Clause 4.14 and 4.16. As I have indicated, however, the defendant did suggest that the information with which it had been provided in respect of some aspects of the expenditure was insufficient to enable it to assess whether it had been applied for the purposes specified.

On the basis that its complaints are justified, the defendant contended that the claimant is liable to refund a further sum of £689,514.51, together with interest thereon, in addition to the monies previously refunded. A large proportion of this sum represents monies which have actually been expended by the claimant but which the defendant alleged was expenditure not reasonably or properly incurred.

The claimant's response summarised

The claimant rejected the defendant's complaints. It asserted that it had applied the defendant's financial contributions solely for the purposes specified in the Section 106 Agreement and, in doing so, had at all times complied with its public law duties. It maintained that it had been fully entitled to apply part of the defendant's financial contributions to defraying internal costs when those costs were incurred directly as a result of the highway works undertaken pursuant to the Section 106 Agreement. The claimant contended also that it had been entitled to use part of the financial contributions to pay debts incurred in connection with the work which had been outstanding at the time the residential development was completed. As to the documentation provided in response to the defendant's requests for information about its expenditure of the defendant's financial contribution, the claimant's position was that it had provided sufficient documentation for the defendant's purposes and was not obliged to provide any greater level of detail.

The issues to be determined

I had hoped that counsel would be able to agree a list of issues to be determined in this judgment. In the event, that has not been possible and, instead, each party has submitted its own list. There is, however, broad agreement that I should decide the following six issues:

i) Should terms be implied into Clause 4.14 and 4.16 of the Agreement to the effect that the claimant's expenditure of the defendant's contributions must be "reasonably" (in the "common law sense") and "properly" incurred?

ii) Did Clause 4.14 and Clause 4.16 of the Agreement give rise to the creation of a trust and, if so, what fiduciary duties were owed by the claimant and to whom?

iii) What is the meaning of "account" in Clause 4.16.2(A)? In particular, does it include a requirement to explain and justify the expenditure incurred?

iv) Should terms be implied into Clause 4.14 requiring the claimant to account to the defendant for the costs of the relevant works carried out pursuant to that Clause, to provide evidence of the sums expended and to refund to the defendant any unexpended funds?

v) Should terms be implied into Clause 4.16 providing that, if the claimant should (a) fail adequately to account to the defendant for the costs of the works undertaken pursuant to that Clause and/or (b) fail to provide such evidence of the costs as is reasonably required by the defendant, the claimant should be required to refund to the defendant that part of its financial contributions for which no sufficient account and/or evidence has been provided?

vi) How should the word "expended" in Clause 4.16.2 be interpreted?

In addition, both parties seek a ruling on the role of the expert appointed pursuant to Clause 10 of the Section 106 Agreement.

The parties considered that, once those issues have been decided, it should be possible for them to reach agreement as to the appropriate declarations to be made by the court.

Implied terms: the law

Before dealing with the issues identified above, it is necessary to say something about the principles of law governing implied terms. Those principles are well-established and are not in issue between the parties.

The general presumption is that the parties have expressed every material term which they intended should govern their agreement: Luxor (Eastbourne) Ltd v Cooper [1941] AC 108. The presumption is especially strong when the contract is in writing and represents an apparently complete bargain.

An implied term must be necessary to give business efficacy to the contract and must be one to which the parties, as reasonable people, would inevitably have agreed if it had been suggested to them at the time the contract was being negotiated. In other words, a term may be implied only if it was so obvious as to go without saying: see Comptoir Commercial Anversois v Power, Son and Co [1920] 1 KB 828, in which Scrutton LJ said at 899:

"The Court… ought not to imply a term merely because it would be a reasonable term to include if the parties had thought about the matter, or because one party, if he had thought about the matter, would not have made the contract unless the term was included; it must be such a necessary term that both parties must have intended that it should be a term of a contract, and have only not expressed it because its necessity was so obvious that it was taken for granted".

Similarly, in Shirlaw v Southern Foundaries [1939] 2 All ER 113, at 125, MacKinnon LJ stated :

"'Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying.'

Thus, if, while the parties are making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common: 'Oh of course'".

It is not for the court to decide whether the implied term proposed would have merit or would have been an appropriate addition to the terms expressly agreed. A term can be implied only if the parties plainly intended it to form part of the contract. As Lord Pearson said in Trollope & Coles Ltd v North West Metropolitan Regional Hospital Board [1973] 1WLR 601 (at 609 B-D):

"The court's function is to interpret and apply the contract which the parties have made for themselves. If the express terms are perfectly clear and free from ambiguity, there is no choice to be made between different possible meanings: the clear terms must be applied even if the court thinks some other terms would have been more suitable. An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract: it is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them: it must have been a term that went without saying, a term necessary to give business efficacy to the contract, a term which, though tacit, formed part of the contract which the parties made for themselves."

It has often been stated that the test to be applied is one of necessity, not merely reasonableness. In Liverpool City Council v Irwin and Another [1977] AC 239, Lord Wilberforce said at 254F-G:

"In my opinion such obligation should be read into the contract as the nature of the contract itself implicitly requires, no more, no less: a test, in other words, of necessity."

In the same case, Lord Edmund-Davis said at 266C-D:

"The touchstone is always necessity and not merely reasonableness".

A distinction was drawn by Lord Cross in Irwin (and approved by Lord Hope in J H Ritchie Ltd v Lloyd Ltd [2007] 1 WLR 670) between, on the one hand, contracts for certain common types of transaction (e.g. sale of goods, landlord and tenant agreements) and, on the other hand, detailed agreements made for the purpose of individual transactions. Of the former type of contract, Lord Cross said at 257H-258A:

"When it implies a term in a contract the court is sometimes laying down a general rule that in all contracts of a certain type – sale of goods, master and servant, landlord and tenant and so on – some provision is to be implied unless the parties have expressly excluded it. In deciding whether or not to lay down such a prima facie rule the court will actually ask itself whether in the general run of such cases the term in question would be one which it would be reasonable to insert."

He went on to contrast this with the position with an individual agreement:

"Sometimes, however, there is no question of laying down any prima facie rule applicable to all cases of a defined type, but what the court is being in effect asked to do is to rectify a particular – often a very detailed – contract by inserting in it a term which the parties have not expressed. Here it is not enough for the court to say that the suggested term is a reasonable one the presence of which would make the contract a better or fairer one: it must be able to say that the insertion of the term is necessary to give – as it is put – "business efficacy" to the contract and that if it its absence had been pointed out at the time both parties – assuming them to have been reasonable men – would have agreed without hesitation to its insertion".

The test in the latter type of case was, he said, that of necessity.

It is not sufficient that, had the parties perceived that their agreement failed to provide for a particular circumstance, they would have wanted to remedy that failure. There must be certainty as to the way they would have chosen to do so. This is clear from the words of Sir Thomas Bingham MR (as he then was) in Phillips Electronique Grant Public SA v British Sky Broadcasting Ltd [1995] EMLR 472 at 481:

"… it is not enough to show that had the parties foreseen the eventuality which in fact occurred they would have wished to make provision for it, unless it can also be shown either that there was one contractual solution or that one of several possible solutions would without doubt have been preferred".

Although the law in this area is well-settled, the parties did not agree on its application in the present case. I shall now proceed to deal with the various issues to be determined.

Issue 1: Should a term be implied into Clause 4.14 and Clause 4.16 of the Section 106 Agreement to the effect that the claimant's expenditure of the defendant's contributions must be "reasonably" (in the "common law sense") and "properly" incurred?

The defendant's case

For the defendant, Mr Richard Phillips QC submitted that there should be implied into both Clause 4.14 and 4.16 a requirement that the claimant's expenditure of the defendant's contributions made pursuant to the Section 106 Agreement must be reasonably and properly incurred, i.e. incurred in accordance with the standards of reasonableness applicable to the "industry". In that context, the word "reasonable" was intended to bear what has in this case been termed its "common law sense", rather than the meaning given to it in the public law context, i.e. so-called "Wednesbury (a reference to the well known case of Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223) reasonable".

Mr Phillips submitted that, when making the Section 106 Agreement, the claimant had been exercising its statutory functions in the public interest. In those circumstances, he said, it would have been extraordinary if it had not been intended by both parties that the claimant would act reasonably and properly in spending the defendant's financial contributions made under the Agreement. Mr Phillips suggested that the proposed implied term had been too obvious to require spelling out in the Agreement. He submitted that it could not possibly have been intended that the claimant should have carte blanche to spend the defendant's contributions as it wished, in ways that were not reasonable (in the "common law sense") or proper, i.e. not in accordance with the usual standards governing such work.

Referring to the distinction drawn by Lord Cross in Irwin (see paragraph 41 above), Mr Phillips argued that, since all Section 106 Agreements are similar in character, the Agreement in this case fell into the "standard" category of contracts referred to by Lord Cross, as a result of which the appropriate test to be applied when deciding whether a term should be implied into the Agreement was that of reasonableness, rather than necessity. He argued that it was plainly reasonable to imply a term that the claimant should expend the defendant's contributions reasonably and properly. No reasonable public authority could, he said, have failed to agree to such a term if it had been mooted. Moreover, there would have been nothing onerous about complying with such a term.

Mr Phillips submitted that, even if the appropriate test were that of necessity (rather than reasonableness), a term that the claimant should expend the defendant's financial contributions reasonably and properly should plainly be implied. It was, he said, necessary for this to be done in order to ensure that the defendant's financial contributions were used responsibly and for the purpose for which they were intended. If there was no term requiring the claimant to spend the contributions reasonably (in the "common law sense") and properly, there was a clear risk that the claimant might spend the money profligately and that, as a result, the defendant would not receive the refunds to which it would properly have been entitled. By that means, the efficacy of the contract might be undermined or frustrated. Moreover, if the proposed term was not implied into the Section 106 Agreement, the defendant would have no means of ensuring that its contributions made under the Agreement had been spent on the works for which they were intended, rather than, for example, on defraying items of the claimant's internal expenditure which would have been incurred even had the Agreement not existed.

Mr Phillips submitted also that, if the proposed term was not implied into the Agreement, the role of the expert appointed under Clause 10 of the Section 106 Agreement would be entirely emasculated. Clause 10 provided that the expert should have specific qualifications and experience. The purpose of that requirement was, he said, to ensure that the expert would be qualified to decide such matters as what constituted "reasonable" expenditure by reference to the standards of the industry. The intention of the parties must therefore have been that the appointed expert should address the issue of whether expenditure on work undertaken by the claimant had been reasonably and properly incurred.

The claimant's case

For the claimant, Mr Peter Village QC emphasised that the Section 106 Agreement was the product of careful negotiation and drafting. Both the claimant's legal department and the solicitors acting for the then owner of the development site were highly experienced in planning matters and in the drafting of such Agreements. He submitted that, following the principles set out in the cases previously referred to, the court should assume that the parties had set out in the written Agreement every term which they had intended should be included. The express terms of the Agreement were sufficiently clear and explicit to govern the obligations between the parties without the need for any additional term(s) to be implied.

Mr Village said that, had it been suggested when the Section 106 Agreement was being negotiated that it should include a term whereby the claimant was required to expend the defendant's financial contributions "reasonably" (in the common law sense) and "properly", the claimant would have refused to agree such a term. The claimant would readily have agreed that it had a duty, when spending the defendant's financial contributions, to act reasonably in the "Wednesbury sense" and to spend the contributions in good faith and for the purposes specified. It owed those duties by reason of its position as a public authority, acting in its public capacity. Within those parameters, however, the claimant had a wide discretion as to how to act.

Mr Village said that, by contrast, the implied term contended for by the defendant would have required the claimant to act "reasonably" and/or "properly" by reference to standards imposed by a third party - ultimately the expert appointed under Clause 10 of the Section 106 Agreement. This would have imposed on the claimant a duty which was inconsistent with (and more onerous than) the claimant's public law duties. It would have required the claimant, when deciding on its choice of highway scheme and manner of undertaking the relevant works, at all times to have an eye to the standards of reasonableness and propriety that might in the future be applied by the appointed expert. In the unlikely event that the claimant had been prepared to consider the insertion of such a term, it would have done so only after careful consideration and negotiation and after taking steps to ensure that the standards of reasonableness and propriety to be applied were clearly defined in advance. Otherwise, there would have been an obvious risk that the parties would have different views about the standards to be applied and that a dispute resulting in a hearing before the appointed expert, or even the courts, would result. Furthermore, if it had been intended that the claimant's discretion should be constrained in the manner suggested by the defendant, this could have been achieved only by setting out in the Section 106 Agreement clear and unambiguous terms to that effect.

Mr Village relied also on Pickwell v Camden London Borough Council [1983] 1QB 962. Pickwell, and the earlier case of Roberts v Hopwood [1925] AC 578, were cases where the district auditor had disallowed (Roberts) or challenged (Pickwell) certain items of expenditure by a local authority on the ground that they were contrary to law.

Mr Phillips had initially relied on that part of the headnote in Roberts which states that:

"… the discretion conferred upon the council by the statute must be exercised reasonably …".

However, as the subsequent decision in Pickwell made clear, the word "reasonably" in that context is to be construed in the sense of "Wednesbury reasonably". In Pickwell, Ormrod LJ said at 1001B:

"The headnote to the report [in Roberts] is misleading because it suggests that the decision depended upon the unreasonableness of the exercise of the discretion and the excessiveness of the expenditure, that is, a quantitative rather than a qualitative test".

At 1003E, Ormrod LJ cited a passage of the speech of Diplock LJ in Luby v Newcastle-under-Lyme Corporation [1964] 2QB 64 at 72:

"The court's control over the exercise by a local authority of a discretion conferred upon it by Parliament is limited to ensuring that the local authority has acted within the powers conferred. It is not for the court to substitute its own view of what is a desirable policy in relation to the subject-matter of the discretion so conferred. It is only if it is exercised in a manner in which no reasonable man would consider justifiable that the court is entitled to interfere".

Ormrod LJ went to say:

"In my judgment, this passage should be regarded as definitive of the court's powers and should be adhered to in all cases in which it is claimed that an authority has misused its discretionary power".

Mr Village argued that it is clear from Pickwell that, under public law principles, it is not open to a court to interfere with the discretion exercised by a local authority merely because the authority may have made a bad bargain or because its expenditure on an individual item may have been greater than others might consider reasonable. The question is whether the evidence establishes that the authority's spending was unreasonable or irrational, in the sense that no reasonable local authority would have acted in the same way.

In response to the suggestion made by the defendant that the principle set out in Pickwell was applicable only where a public authority was given discretion by statute and/or where the court (as opposed to an individual – such as the appointed expert – identified in the relevant contract) was seeking to interfere with the authority's exercise of its discretion, Mr Village cited authorities from the commercial world, in particular the case of Socimer International Bank Ltd (in liquidation) v Standard Bank London Ltd [2008] EWCA Civ 116. Socimer involved, inter alia, the issue of whether there were limits on the discretion conferred on a party under a contract. Having reviewed a number of authorities, Rix LJ said at paragraph 66:

"It is plain from these authorities that a decision-maker's discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused. Reasonableness and unreasonableness are also concepts employed in this context, but only in a sense analogous to Wednesbury unreasonableness, not in the sense in which that expression is used when speaking of the duty to take reasonable care, or when otherwise deploying entirely objective criteria …"

Mr Village argued that cases such as Socimer demonstrated that the principle in Pickwell is not confined to cases where the court was seeking to interfere with a discretion conferred by statute. It is also applicable to parties who have discretion conferred on them under a contract.

Mr Village further submitted that the proposed implied term, as drafted, was not clear and unambiguous. The defendant's suggestion that the reasonableness and propriety of the claimant's actions should be judged by reference to "industry" standards was far too uncertain. There would be an obvious problem in ascertaining precisely what standards should be applied. In any event, it was inappropriate for standards applicable to commercial organisations, governed solely by commercial interests, to be applied to a public authority which was required to act in the public interest. In addition, there was no explanation within the Agreement of the meaning of the word "properly". It was not clear whether it was intended that the word "properly" should add anything to the claimant's public law duties or to the express terms in the Agreement that the defendant's financial contributions should be used for certain specified purposes.

Discussion and conclusions

Where an agreement has – like this Section 106 Agreement – been carefully negotiated and drawn up by experts acting for all parties, the circumstances in which it is appropriate to imply additional terms into the agreement are very limited.

It is clear from dicta in cases such as Pickwell and Luby that the courts will interfere with a local authority's exercise of its statutory discretion in expending monies only to the extent that it may have acted unreasonably (in the public law sense) or in bad faith and/or insofar it may have applied the relevant funds for an improper purpose. In other words, the authority is obliged to comply with its public law duties and no more. In the commercial context, Socimer demonstrates that a party who is given discretion under a contract owes similar duties to those applicable at public law.

Thus, the implied term proposed by the defendant (i.e. a requirement that the claimant's expenditure of the defendant's financial contributions made pursuant to the Section 106 Agreement should be reasonable - in the common law sense - and proper) would impose duties on the claimant which were significantly wider than the public duties to which it would in any event be subject. The proposed implied term would require the claimant in the exercise of its discretion to comply with standards of reasonableness and propriety imposed by a third party.

The standards of "reasonableness" and "propriety" which it is proposed by the defendant should be applied are very uncertain. Those standards have not been the subject of discussion or negotiation – still less agreement – between the parties. Quite what "industry" standards could appropriately be applied to the activities of, and expenditure by, a highway authority is not entirely clear to me. Nor is it clear to me what additional element of duty (if any), over and above the claimant's ordinary public law obligations, is intended by the defendant to be imposed by the use of the word "properly".

I find that if, at the time the Section 106 Agreement was being negotiated, it had been suggested to the claimant that the proposed implied term should be included, the claimant would have declined to agree such a term because of the significantly wider duties that would have been imposed on it as a result.

In the unlikely event that the claimant had been prepared to consider the inclusion of such a term, I have no doubt that it would first have required the standards of reasonableness and propriety that were to be applied to be carefully identified and/or defined. Without such a precaution, the claimant could never have been certain that its decision making processes or its system of carrying out the highway works would meet the relevant standards. Breach of the standards could have serious financial consequences. If the claimant was found to have breached the relevant standards, it might well find itself liable to refund to the defendant monies that had already been expended on the relevant highway works. A local authority would be very anxious to avoid placing itself in such a position.

I find also that the proposed implied term is not necessary to give business efficacy to Clause 4.14 and 4.16. In the absence of a requirement that the expenditure must be "reasonable" (in the common law sense) and proper, the exercise of the claimant's discretion would not be left entirely unfettered. It was an express term of Clause 4.14 and 4.16 that the defendant's contributions should be used only for the purposes specified therein. In addition, the exercise of the claimant's discretion would be subject to the usual public law requirements of Wednesbury reasonableness and good faith. If the claimant were to act in breach of its public law duties, the defendant would have a remedy in judicial review. The absence of the proposed implied term did not render Clause 4.14 or 4.16 in any sense unworkable. I do not accept that the absence of the proposed implied term has the effect of emasculating the role of the appointed expert under Clause 10 of the Section 106 Agreement. The Agreement gives rise to many issues which may be the subject of dispute between the parties and may appropriately be determined by an expert appointed under Clause 10.

I do not accept that the correct test in the case of this Agreement was reasonableness, rather than necessity. Although there may be some similarities in the form of many Section 106 Agreements, each one is individually tailored to meet the requirements of the parties and the circumstances of the relevant development project. In any event, even if the test were "reasonableness", I would not find that it was reasonable to imply the proposed term for the reasons that I have already explained.

Issue 2: Did Clause 4.14 and Clause 4.16 of the Agreement give rise to the creation of a trust and, if so, what fiduciary duties were owed by the claimant and to whom?

The defendant's case

The defendant further contended that the claimant, as the recipient of monies deposited with it by the defendant under the Section 106 Agreement, was a trustee of those monies and therefore owed to the defendant, as beneficiary of the trust, the usual fiduciary duties. Mr Phillips based this submission on the decision of the Court of Appeal in the case of Patel and Others v Mayor and Burgesses of the London Borough of Brent [2005] EWCA Civ 644. In that case, the appellants, who were trustees of a religious charity, entered into an agreement with a house builder to sell a site on which the house builder had obtained planning permission for a housing development. One condition of that permission was that the appellants should enter into a Section 106 Agreement. The Agreement required the appellants to deposit with the respondent highway authority the sum of £550,000, to be held in a designated interest-bearing bank account from which the respondent would draw down the monies necessary to carry out certain highway improvements which were specified in Clause 5 of the Agreement. At the conclusion of the works, any unexpended balance in the account was to be returned to the appellants.

The appellants duly deposited the agreed sum with the respondent and the development proceeded. It was completed in October 1994. By August 1999, the highway improvements envisaged in Clause 5 had still not been started. The appellants therefore requested the return of the deposited sum together with interest. That produced no result. In 2000, when proceedings were threatened, the respondent undertook some works which it asserted were covered by Clause 5 and drew down from the account the monies necessary to pay for those works. The appellants commenced proceedings seeking, inter alia, return of the whole of the deposited sum on the ground of repudiation.

At first instance, the judge concluded that the appellants were not entitled to return of the deposited sum. He further held that the respondent was entitled to recover from the deposited sum the cost of all the work which it had undertaken. However, he held that the respondent was in breach of contract by reason of its delay in carrying out the work. The appellants appealed against the first two findings.

The Court of Appeal considered whether the respondent's failure to undertake the highway works promptly had had the effect of discharging the appellants' obligation under Clause 5. In dealing with that point Latham LJ said at paragraph 15:

"The reality is that the planning obligation created by Clause 5 … involved, as it says, the "deposit" of a sum of money with the respondent to be held with the respondent for certain purposes. As the appellant themselves recognised, indeed argued, this creates a form of trust. The appellants remained the beneficial owners of the money unless or until it was drawn down, but were precluded from exercising their rights of ownership so long as the trust remained in place. It follows that their obligation was not merely to deposit the money, but to permit the respondent to use it for the purposes of the trust. It was, accordingly, an extant planning obligation at all relevant times".

Mr Phillips argued that the effect of Clause 4.14 and 4.16 in the present case was essentially identical to that of Clause 5 in Patel. Any differences between the terms of the Clauses in the two cases were immaterial. Thus, as in Patel, the claimant held the monies on trust for the defendant, which remained the beneficial owner of the monies at all times until they were drawn down for use for the purposes of the trust. Mr Phillips submitted that the fiduciary duties owed by the claimant included duties to spend the trust money reasonably (in the common law sense) and properly for the specified purpose, not to profit from trust property and not to place itself in a position whereby its own interests were in conflict with that of the trust/beneficiary. These latter two duties were, he argued, of particular significance in the light of the claimant's decision to use substantial sums from the defendant's financial contributions to pay its own employees' salaries and administrative expenses.

The claimant's case

For the claimant, Mr Village relied on the House of Lords case of Swain and Others v Law Society [1983] AC 599, which concerned the making of rules relating to professional indemnity insurance for solicitors by the Law Society (the Society) pursuant to its powers under section 37 of the Solicitors Act 1974. The Society had agreed with insurance brokers appointed for the purposes of the indemnity insurance scheme that it would receive a proportion of the commission paid to the brokers by the insurers providing the cover. The Society decided to retain the commission received from the brokers, rather than to account for it to solicitors who had paid their insurance premiums. Two solicitors objected to the Society's decision. They contended that the Society held the commission on trust for the solicitors, an argument that was accepted by the Court of Appeal.

The House of Lords disagreed. Lord Brightman (with whom the other members of the Committee agreed) concluded that, in exercising its powers under section 37, the Society was acting in its public capacity in the interests, not only of the solicitors' profession, but also of the wider public. He said at 618E-F:

"This approach, which in my opinion is fundamental, has important consequences, because the nature of a public duty and the remedies of those who seek to challenge the manner in which it is performed differ markedly from the nature of a private duty and the remedies of those who say that the private duty has been breached. If a public duty is breached, there is a remedy of judicial review. There is no remedy in breach of trust or equitable account. The latter remedies are available, and available only, when a private trust has been created. The duty imposed on the possessor of a statutory power for public purposes is not accurately described as fiduciary because there is no beneficiary in the equitable sense".

Mr Village argued that the principles enunciated in Swain applied in this case. The claimant had made the Section 106 Agreement in its public capacity. No private trust had been created. There was no "beneficiary" in the equitable sense. To the extent that there were any beneficiaries these beneficiaries were the public.

Mr Village said that the principle set out in Swain applied also to the circumstances in Patel. However, the Court of Appeal in Patel had not been referred to Swain. The (Chancery Division) Judge who heard the Patel at first instance did not suggest that a resulting trust had been created. It seems that the issue of a trust arose only in the course of argument at the appeal hearing. Mr Village submitted that Patel had been decided per incuriam. He further submitted that, in the event that I accept that Swain is applicable to the circumstances of this case, I am bound to follow the principles set out therein, rather than the decision in Patel. He contended that, in any event, the present case is distinguishable from Patel on its facts.

Mr Village further argued that, even if a trust relationship had existed, the fiduciary duties owed by the claimant would have required no more than that the claimant should spend the defendant's contribution in good faith for the specified purposes and reasonably, in the Wednesbury sense. In other words, its duties would have been no wider than those usually owed by a public authority. In support of this contention, he relied on dicta of Ormrod LJ in Pickwell. Having quoted the passage from the judgment of Diplock LJ (as he then was) in Luby (see paragraph 53 of this judgment), Ormrod LJ went on at 1003G:

"The latest case is Bromley London Borough Council v Greater London Council [1983] 1AC768. This again was an ultra vires case which involved difficult questions of construction of some obscurely worded statutory provisions … In so far as the speeches in the House of Lords dealt with the question of discretion, they affirmed Jenkins LJ's opinion in Prescott v Birmingham Corporation [1955] Ch 210, that local authorities owe a fiduciary duty to their ratepayers. As in Prescott's case, the existence of this duty was a relevant factor to be taken into account in determining the ambit of the statutory powers. However, it would not be right to regard this case as authority for the general proposition that this fiduciary duty opens up a route by which the courts can investigate and, if thought appropriate, interfere with any exercise of their discretionary powers by local authorities. This would completely undermine the principles of the Wednesbury case … and make nonsense of Diplock LJ's definition of the court's powers in Luby…"

At 1005B-C, he said:

"Some reliance was also placed on the fiduciary duty owed by Camden to its ratepayers, but this line of attack must have a very limited application, if any, in a case in which the local authority had ample authority to determine wage rates, were genuinely acting on that authority, and on their appreciation of problems and conditions with which they were confronted. The fiduciary duty, as I understand it, arises because the councillors are entrusted with ratepayers' money to use it for duly, that is legally, authorised purposes and not otherwise, much as trustees hold the trust fund, to apply it for the purposes authorised by the trust instrument, or by statute, as the case may be".

Mr Village argued that – just as the fiduciary duties owed by a local authority to its ratepayers are limited to those public duties that it would ordinarily owe – any fiduciary duties owed to an individual provider of funds to a local authority for a specific purpose would be similarly limited.

Discussion and conclusions

The claimant entered into the Section 106 Agreement in its capacity as a public authority, acting in the public interest and pursuant to statute. The purpose of the Agreement was to mitigate the effects on members of the public of the development to be undertaken by the defendant. This was not a private agreement. In Swain, the House of Lords made it clear that the exercise by a public authority of its powers in the public interest did not give rise to the creation of a private trust.

I am satisfied that the principles enunciated in Swain are applicable to the circumstances of the present case. In those circumstances, it seems to me that, if the factual circumstances of Patel and the present case were identical, rules of precedent would require me to follow the House of Lords decision in Swain rather than the Court of Appeal's decision in Patel.

However, the factual circumstances of the two cases are not identical. Clause 5 of the Section 106 Agreement in Patel required the appellants to "deposit" a specified sum with the defendant. The deposited sum was to be placed in a designated bank account separate from the respondent's other funds. It seems from his judgment that Latham LJ attached importance to the use of the word "deposit" in reaching his conclusion that a trust had been created. The arrangement in Patel was that the respondent would "draw down" monies from the designated bank account (also described in the Section 106 Agreement as a "fund") as and when required in order to carry out the works. Any unexpended monies remaining in the designated bank account after completion of the work were to be "released and repaid" to the appellant. It is against that background that the Court of Appeal came to the conclusion that a trust had been created, whereby the appellants retained beneficial ownership of the monies deposited unless and until they were drawn down but were precluded from exercising their rights of ownership as long as the trust remained in place.

In the present case, by contrast, the Section 106 Agreement referred to the requirement that the defendant should "pay" "contributions towards" the relevant works. Those words do not suggest an intention to create a trust. Moreover, the financial contributions, when made, were not kept in a separate bank account, but were placed in the defendant's general bank account and mixed with other monies belonging to the defendant. Such an arrangement would be inconsistent with the holding of the contributions on trust. I am satisfied therefore, that the present case is distinguishable from Patel on its facts and I find that, given the terms of Clause 4.14 and 4.16, no trust was created in this case.

Even if a trust were created, that does not necessarily mean that the fiduciary duties owed by the claimant would be any wider than its public law duties. In the present case, the claimant was dealing with monies paid to it by a third party to be used for specified purposes. A single local authority may be a party to a number of Section 106 Agreements, all requiring financial contributions from the relevant developer. It may in addition receive financial contributions from other third parties to be used for a range of different purposes. If each such financial contribution had the effect of creating a trust and giving rise to fiduciary duties more onerous than the duties owed at public law, that would have the effect of widening significantly the scope for the courts to investigate and interfere with the authority's exercise of its discretionary powers and would make significant inroads into the principles enunciated in the Wednesbury case. Following the principles set out in Luby and Pickwell, I find that any fiduciary duties which the claimant may have owed in relation to its expenditure of the defendant's financial contributions would have extended no further than its public law duties.

Issue 3: What is the meaning of "account" in Clause 4.16.2(A)? In particular, does it include a requirement to explain and justify the expenditure incurred?

The defendant's case

The defendant contended that the duty imposed on the claimant by Clause 4.16.2(A) to "account" to the defendant "for the cost of the alternative schemes" clearly meant more than a duty simply to provide information from which it would be possible arithmetically to ascertain the sums spent on the relevant works.

Mr Phillips submitted that the term "account" should be interpreted as including a requirement to "explain" and "justify" the decision-making process and works which gave rise to the relevant expenditure. This would, he said, include providing an explanation as to why one scheme (e.g. the construction of a roundabout at a junction) had been undertaken in preference to other possible schemes (e.g. the installation of traffic lights at the same site). The duty to account would also, he said, include the provision of documents (such as Committee reports and consultants' reports) which had contributed to the decision-making process. He argued, in relation to the alternative schemes to be carried out in the event that the Fleet Inner Relief Road scheme did not go ahead, that - given that there had been no agreement or detailed negotiation between the parties about possible alternative schemes - it was clear that the parties must have intended that information explaining and justifying the decision to undertake the schemes would be provided. If no such explanation or justification were provided, the defendant would have no means of knowing whether the claimant's expenditure of its financial contributions had been reasonably (in either the common law or the Wednesbury sense) and properly incurred. Nor would it know whether it had any grounds for lodging a dispute to be determined by the appointed expert.

The claimant's case

For the claimant, Mr Village submitted that the requirement to "account" should not be taken as including a duty to provide a detailed explanation and justification of the claimant's decisions as to what work to carry out and how to do the work. Nor, he argued, should the word "account" be interpreted to mean that the claimant was required to establish that the expenditure was incurred reasonably (in the common law sense) and properly. He said that such an interpretation would go far beyond that which would have been understood by a reasonable person in the parties' position at the time of the making of the Agreement. The claimant would not have agreed to such a requirement, which would have been inconsistent with the extent of its public law duties.

Discussion and conclusions

Clearly, a duty to account for the costs of certain works must include a duty to provide information stating what sums have been spent, for what purpose, when and by whom. The question is whether the duty goes further than that and extends to the provision of information designed to explain and justify to a developer's satisfaction the various decisions taken as to what work to undertake and how to undertake it.

In my judgment, the phrase "account for … the costs" does not oblige a local authority in the claimant's position to disclose information designed to explain the reasons why the various decisions underlying the works were taken and to justify those decisions. The words must be viewed in context. Here, the relevant context is that the claimant is not required to establish – as I have found – that its expenditure of the defendant's contributions was reasonably (in the common law sense) and properly incurred. It follows therefore that there can be no requirement to provide information aimed at establishing that fact. If it had been intended by the parties that such additional information would be provided, the Agreement should have made express provision for it.

The provision of information stating what sums have been spent, for what purpose, when and by whom, especially when accompanied by documents evidencing the claimant's expenditure as reasonably required by the defendant pursuant to Clause 4.16.2(C), would or should suffice to enable a developer to satisfy itself that its contributions have been spent for the purposes specified and otherwise in accordance with the claimant's public law duties. The Agreement does not require the claimant to provide more.

Issue 4: Should terms be implied into Clause 4.14 requiring the claimant to account to the defendant for the costs of the relevant works carried out pursuant to that Clause, to provide evidence of the sums expended and to refund to the defendant any unexpended funds?

Clause 4.14 contained no requirement that the claimant should account for the costs of the traffic management measures and Cove Road improvements or provide evidence to the defendant of its expenditure thereon. Nor – unlike Clause 4.16 – did it require the claimant to refund any part of the defendant's financial contribution which remained unexpended after completion of the highway works. Notwithstanding the absence of any express provisions in Clause 4.14, the claimant has in fact provided information and evidence (albeit, the defendant says, not sufficient for its needs) about the work done pursuant to Clause 4.14 and the costs thereof. It has also refunded a sum which it contends represents the whole of the unexpended balance after completion of the works undertaken pursuant to Clause 4.14.

The defendant's case

The defendant invited me to imply into Clause 4.14 terms that the claimant should (i) account to the defendant for the cost of the relevant works, (ii) provide to the defendant such evidence of its expenditure as the defendant might reasonably require and (iii) forthwith refund any unexpended balance of its contribution to the defendant.

Mr Phillips contended that the purpose of the defendant's Clause 4.14 contribution was to facilitate the carrying out of specific highway works in close proximity to the development site, which works were needed to accommodate the increased traffic using the site. The contribution was to be paid once 350 homes on the site were occupied, i.e. at a relatively early stage of the development. Clause 4.14 provided that the contribution was "towards traffic management measures in the vicinity of the Development Site and improvements to Cove Road and for no other purpose". Therefore, he said, once the works were completed, the purpose of the obligation had been fulfilled. Any balance of the contribution which remained unexpended could not be used by the claimant for any other purpose. If, at the time of making the Agreement, the parties had envisaged that any balance would be left after completion of the works, they would inevitably have agreed that the balance should be refunded to the defendant. They would not have intended that the balance should be retained by the claimant in perpetuity to be used for purposes other than the carrying out of the works provided for in Clause 4.14.

Mr Phillips argued that the implied terms to account and to provide evidence of expenditure were necessary in order to give business efficacy to Clause 4.14. If no such terms were implied, the defendant would have no means of verifying the amounts spent on the relevant works and/or whether the sums expended had been reasonably (in the common law sense) and properly incurred. The claimant might have elected to do only a small amount of work and to retain the balance of the defendant's contribution. In the absence of accounts and/or evidence of the monies expended, the defendant would have had no means of knowing what had been done, whether the expenditure had been reasonably incurred or indeed whether it had been used for the purpose(s) specified in the Section 106 Agreement. The defendant would effectively be deprived of its ability to challenge the expenditure by means of the dispute procedures pursuant to Clause 10 of the Agreement. The defendant argued that the implied terms contended for were so obvious that the parties would readily have agreed to them, had they been considered at the time the Agreement was made.

The claimant's case

For the claimant, it was argued that the parties had provided for refunds to be made in the circumstances set out in Clause 4.16.2(C). No such provision was contained in Clause 4.14, a fact which, Mr Village said, demonstrated that the parties cannot have intended that a refund of any unexpended balance should be made. The contribution had been calculated in advance as being a reasonable sum to be paid towards the necessary work. Mr Village contended that the claimant has the right to retain the money in perpetuity.

So far as the proposed implied terms requiring the claimant to account for the costs of the works and to provide evidence of those costs, Mr Village argued that it was neither reasonable nor necessary to imply the terms contended for. The fact that Clause 4.16.2(A) and (C) contained, respectively, a requirement to account for the costs of the works and to provide evidence of the sums expended thereon, demonstrated that the parties had those requirements in mind at the time the Agreement was made. Thus, the omission of any such requirements from Clause 4.14 must, it is said, have occurred as a result of a deliberate decision by the parties.

Mr Village further submitted that it was clear that the parties had not deemed it necessary to insert in Clause 4.16 a requirement that the claimant should account for the costs incurred in respect of the traffic management measures and Cove Road improvements or the Fleet Inner Relief Road scheme (if undertaken). The duty to account was imposed solely in relation to the "alternative schemes", the nature of which had not been the subject of detailed discussion or negotiation between the parties. That was clearly what had been intended. So far as the provision of evidence was concerned, that was required only in relation to the cost of the Fleet Inner Relief Road scheme or the alternative schemes undertaken by the claimant under Clause 4.16.2(A). In relation to both those schemes, there was an express term entitling the defendant to the refund of any unexpended monies. It appeared that the parties had considered that, where a refund was payable, evidence of expenditure should be provided. There was no express provision for a refund in Clause 4.14 and therefore no express term requiring the provision of evidence of expenditure. Again, it was clear that the omission was intentional.

Mr Village submitted that the lack of express terms requiring the provision of an account or evidence of expenditure did not prevent the defendant from obtaining sufficient evidence for its purposes. If it had wished to obtain information about the costs of the Clause 4.14 works or the Fleet Inner Relief Road scheme (had it been undertaken), it would have been open to the defendant to request such information from the claimant, to examine public documents (Committee Reports, accounts, etc.) or, if unable to obtain the required documents by those means, to make a request under the Freedom of Information Act 2000. In the event, the defendant had voluntarily provided information about the cost of the Clause 4.14 works, together with supporting evidence of expenditure on those works.

Discussion and conclusions

Under the terms of Clause 4.14, the claimant was entitled to use the defendant's contribution to fund traffic management measures in the vicinity of the development site and improvements to Cove Road and for no other purpose. The claimant's contention was that it should retain any unexpended balance of the contribution to be spent at some unknown time in the future. Given the restrictions as to the purpose for which the contribution could be applied, it clearly could not merely be placed in a "general pot" for use in connection with any scheme of the claimant's choice. Presumably, the claimant envisaged spending the unexpended monies on future highway works in the geographical areas specified in Clause 4.14. In my judgment, however, that is not what was intended by the parties when the Agreement was made. The defendant's contributions were not intended to provide a fund from which future repairs and improvements to the relevant areas could be undertaken as and when the claimant deemed necessary. The context in which the Schedule 106 Agreement was made required that the works undertaken had to be directly related to the proposed development. The works specified in Clause 4.14 were intended to mitigate the effects of the development from a time at or about the time of its construction.

Thus, it seems to me that Clause 4.14, as drafted, left an obvious lacuna in that no provision was made for what should happen in the event that a part of the defendant's financial contribution remained unexpended after the necessary highway works had been completed. Upon completion of those works, the purpose for which the contribution was made had been achieved and the claimant was prevented from using the balance of the contribution for any other purpose. Some additional term was plainly required in order to achieve business efficacy by determining what was to happen to the unexpended balance.

The only term which, if implied, would provide an effective solution and would accord with the express terms of Clause 4.14 is a term providing for the refund of any unexpended balance to the defendant. It is true, as the claimant pointed out, that there was provision for a refund in Clause 4.16.2(C), a fact which would suggest that the parties had considered - but rejected - the possibility of providing for a refund in Clause 4.14. However, it seems to me likely that, at the time the Agreement was being negotiated, the parties did not foresee that there would be any part of the defendant's (relatively modest) financial contribution under Clause 4.14 unexpended at the completion of the relevant works. The contributions to be made under Clause 4.16 were much larger and the likely cost of the works (particularly if "alternative schemes" were undertaken) much less certain. I am quite satisfied that, if the parties had considered the possibility that there might be an unexpended balance of the contribution made under Clause 4.14, then - notwithstanding the stance now taken by the claimant - they would have agreed that, in such circumstances, the unexpended balance should be refunded. I note that, despite the absence of an express term to that effect, the claimant has in fact refunded unexpended monies to the defendant in respect of its Clause 4.14 contribution.

I accept the claimant's contention that the possibility of including in Clause 4.14 requirements for it to account for the costs of the works and to provide evidence of those costs as reasonably required by the defendant must have been considered by the parties at the time of negotiating the Agreement since such requirements appear in Clause 4.16. I accept also the claimant's suggestion that the requirement for proper evidence to be provided was clearly linked (in Clause 4.16.2(C)) to the requirement to refund, whilst the requirement to account was linked with the "alternative schemes" which, at the time the Agreement was made, had not been the subject of detailed discussion between the parties. Since Clause 4.14, as agreed by the parties, contained no requirement to refund and no reference to "alternative schemes", it was not considered necessary to include a requirement to account for the costs or to provide evidence of those costs.

If, however, the parties' attention had been drawn to the issue of what would become of any unexpended balance of the contribution after completion of the Clause 4.14 works and if, as I have found, they would immediately have agreed that a requirement to refund such a balance should be inserted in Clause 4.14, then I am satisfied that, consistent with Clause 4.16.2(C), they would have also considered it necessary to include a term providing for the provision of such evidence of sums expended on the works as the defendant may reasonably require. Such evidence would have been deemed necessary to enable the defendant to check the claimant's calculations so as to ensure that it received a refund in the correct amount.

I am not persuaded, however, that the parties would have considered it necessary or appropriate to insert in Clause 4.14 a requirement that the claimant should account for the costs of the highway works undertaken pursuant to that Clause. Those works had, like the Fleet Inner Relief Road scheme, been the subject of discussion and negotiation between the parties. No obligation to account for the costs of the Fleet Inner Relief Road was imposed under Clause 4.16 despite the fact that the costs of that scheme would have been very large. I can see no reason why the parties should have chosen to act differently in relation to the much smaller scheme to be undertaken pursuant to Clause 4.14. Nor do I regard an implied term to account as necessary in order to give business efficacy to the Clause.

Issue 5: Should terms be implied into Clause 4.16 providing that, if the claimant should (a) fail adequately to account to the defendant for the costs of the works undertaken pursuant to that Clause and/or (b) fail to provide such evidence of the costs as is reasonably required by the defendant, the claimant should be required to refund to the defendant that part of its financial contributions for which no sufficient account and/or evidence has been provided?

The defendant's case

Mr Phillips argued that a term requiring the claimant to refund to the defendant any part of its contributions for which no sufficient account and/or evidence had been provided was necessary in order to give business efficacy to Clause 4.16. The Clause provided no sanction for a failure to comply with the duty to account in Clause 4.16.2(A) or to provide evidence of expenditure under Clause 4.14.2(C). The defendant could therefore be left in a position whereby it had insufficient material to judge whether the claimant's expenditure of its contributions had been reasonable (in either the common law or public law sense) and proper.

Mr Phillips submitted that the absence of a sanction was particularly significant in view of the scale of the financial contributions required under Clause 4.16 and the fact that the Clause gave the claimant discretion to spend the contributions on "alternative schemes", about which there had been no previous discussion or negotiation with the defendant. He argued that, had the parties considered the matter during negotiation of the Section 106 Agreement, they would have agreed without hesitation that the fair and obvious solution was to provide that, if the claimant failed to provide a proper account and/or evidence for certain costs associated with the works, those costs should be refunded by the claimant to the defendant.

The claimant's case

Mr Village contended that the claimant would never have agreed to a provision in the Agreement whereby, if it failed to account for or provide evidence of the costs of the works carried out pursuant the Agreement to the satisfaction of the defendant, it would be liable to refund monies which it had actually expended on the works. Moreover, it was not right to say that there was no sanction for a failure by the claimant to comply with its obligations under Clause 4.16. If a dispute arose as to whether the claimant had provided adequate information and/or evidence so as to satisfy the requirements of Clause 4.16, the matter could be referred to the appointed expert under Clause 10. If there was a wrongful refusal by the claimant to comply with its obligations under Clause 4.16, an application for judicial review might also be appropriate.

Discussion and conclusions

I do not accept that the proposed implied term reflected the common intention of the parties at the time the Agreement was made. If the possibility of its inclusion in the Section 106 Agreement had been raised, I am sure that it would have been highly controversial. The claimant would have been very reluctant to agree to a term that might require it to refund money that it had spent in good faith pursuant to the Agreement. Had the claimant been prepared to entertain the possibility of including such a provision, I am satisfied that, at the very least, it would have wished to include in the Agreement express terms as to the precise nature and extent of information and evidence that it would be required to provide.

Nor do I consider that the term was necessary for the purposes of business efficacy. In the event that the claimant failed to fulfil its obligations under the Section 106 Agreement, there were means available by which the defendant could seek to compel it to comply.

Issue 6: How should the word "expended" in Clause 4.16.2(B) be interpreted?

Clause 4.16.2(B) provided:

"In the event of works on the Fleet Inner Relief Road not being commenced before the occupation of 1,700 dwellings the Contribution paid by [the defendant] shall be refunded save for any part of the Contribution which may have been expended on the alternative schemes".

The defendant's case

The defendant contended that the word "expended" should be construed as relating only to payments which had physically been made in November 2006 (i.e. at the time of occupation of the 1,700^thhome on the development site) and should not be interpreted as extending to sums in respect of which, at that time, there existed merely a commitment to pay at some stage in the future. It was argued that the Agreement clearly envisaged that the highway works would be completed well before completion of the development. The date of the 1,700^th occupation should therefore be viewed as a "cut off date", when it was intended that there should be a final reckoning and when any part of the defendant's contributions that had not yet been expended would be refunded. If that date had not been treated as a final "cut off date", it would have been open to the claimant to deprive the defendant of the benefit of the unexpended balance by entering into contracts for work to be paid from that balance immediately before the 1,700^th home was about to be occupied.

The claimant's case

Mr Village submitted that the word "expended" plainly included sums for which a legal agreement to pay had been entered into, despite the fact that no money had yet changed hands as at November 2006. Once the claimant was committed to pay out those sums, they were not available to the claimant to be used for other purposes. There was nothing in the Section 106 Agreement that precluded such an interpretation.

Discussion and conclusions

I am satisfied that, in the context in which the term is used in Clause 4.16 of the Section 106 Agreement, the word "expended" should be interpreted as including sums relating to the relevant highway works which the claimant already had a legal obligation to pay as at November 2006. Those sums had been committed to funding the works and could not thereafter be used by the claimant for any other purpose. The interpretation urged by the defendant would be illogical and could cause serious detriment to the claimant if, for example, it had not paid a contractor's invoice because of alleged faulty workmanship or because the contractor had delayed in delivering an invoice for the work done.

There is nothing in the express terms of the Section 106 Agreement that suggests to me that this interpretation is wrong. Indeed, I note that Clause 4.16.2(A) provided that the claimant could elect to use the defendant's financial contributions or any part thereof to fund alternative schemes "[a]t any time prior to the completion of the Development". Those words would appear to allow the claimant to take a decision to use the contributions at a very late stage in the life of the development. If a decision was taken very close to completion of the development to undertake further highway works, it is highly likely that payment for those works would be made after the completion date. This supports my view that the claimant's interpretation of the work "expended" is the correct one.

The role of the appointed expert

It follows from my decision in relation to Issues 1 and 2 that the appointed expert does not have jurisdiction to determine whether any sums stated to have been expended by the claimant were reasonably (in the common law sense) and properly incurred. His role is limited to dealing with disputes as to compliance with the express terms of the Agreement.

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	England and Wales High Court (Queen's Bench Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Queen's Bench Division) Decisions >> Hampshire County Council v Beazer Homes Ltd [2010] EWHC 3095 (QB) (29 November 2010) URL: http://www.bailii.org/ew/cases/EWHC/QB/2010/3095.html Cite as: [2011] PTSR D8, [2010] EWHC 3095 (QB)