England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		20 March 2009

Mr Justice COLLINS :

1. The claimants and interested parties are all train operating companies (TOCs). The defendant is a body which was set up by the Railways and Transport Safety Act 2003 and which is responsible for securing the maintenance of an efficient and effective police force to be known as the British Transport Police (BTP) and to police the railways. The defendant has also to defray the expenses of the BTP (2003 Act ss.18 and 20(1) and (2)). The principle applicable to defray these expenses is that the users, that is to say the TOCs, should pay and to that end and to enable policing to be provided each TOC must enter into an agreement with the defendant to be known as a police services agreement (PSA). Section 33(1) of the 2003 Act, uses the word 'may' in providing for the entering into an agreement with the defendant but regulations have made it clear that it is mandatory for a TOC to enter into such an agreement.
2. PSAs existed before the 2003 Act: they have been required for TOCs since privatisation of the railways by the Railways Act 1993. That Act by s.8 enabled the Strategic Rail Authority, the Secretary of State or the Rail Regulator to grant a licence to a TOC. Section 9(2) provided that a licence holder might be required to enter into an agreement with any person and that a condition in a licence could include provision for determining the terms on which such agreements were to be entered into. It was a condition of any licence that the TOC should enter into a PSA. Section 132 of the 1993 Act enabled the Secretary of State to make a scheme whereby inter alia the SRA could make an agreement with any person for making the services of transport police available for such period, to such extent and on such terms as might be specified in its agreement.
3. The BTP had of course existed for some time. Before privatisation its constables were employed by the British Railways Board (BRB) pursuant to the provisions of the Transport Act 1962. This reflected the historical position that the BTP had operated under contractual arrangements enabling its constables to enter any railway property without the need for a warrant. Further, the powers of a constable of the BTP were limited to the exercise of duties involved in dealing with those who had 'committed offences in or in the vicinity of such railways harbours docks inland waterways stations wharves garages hotels works depots or other premises': see British Transport Commission Act 1949 s.53(1)(b). Payment for its services were to be provided by the BRB and other relevant Boards (for example, London Transport or those responsible for docks and harbours).
4. While there has never been any variation of the principle that the users, namely the TOCs, should pay for the services of the BTP, the division of costs between the various TOCs has not been easy to calculate. Broadly, the intent has been to try to ensure that each TOC pays the proportion of the overall cost which reflects the use made by that TOC of the services of the BTP. There will inevitably be elements of judgment and recognition that there may be additional use in a particular area due to an increase of criminal activity in that area, for example, an apprehended or actual terrorist attack on a train. No doubt, one consideration may be the amount of track over which a TOC has a franchise or operates, although the point has not been argued before me (I add this because the Fifth Interested Party (Hex) does not hold a franchise but operates the Heathrow Express and so has a PSA). Following the 1993 Act, the allocation of total cost was dealt with on the basis of the TOCs' 1994/5 budgeted train miles. Each PSA specified an amount as the actual charge and provided that the charge for subsequent years would be the same proportion of total cost. The claimants' PSAs, which were entered into in 1995, reflected this. It was intended that there should be a review of this obviously crude and somewhat unsatisfactory method of calculating the proportion of costs payable by each TOC and the PSAs reflected this in providing that there was to be a reassessment of the proportions payable following a charges review to be put into effect in 1999.
5. The relevant clause in the PSAs is 7.

Clause 7.3 sets out the basis for charging. It reads:-

"Subject to sub-clauses 7.5 and 7.10 the charge due to the Board [now BTPA] from the Company in respect of the Core Police Services to be provided during any year, other than the first year, of this agreement shall be that sum which bears the same proportion to total costs for that year as the rate per annum of [£3,643,040.00] bears to total Cost for the period 1^st April 1994 to 31^st March 1995."

The sum mentioned was that payable for the first year of the Agreement (see Clause 7.2). Clause 7.5 enabled adjustments to be made if there had been undercharging.

6. The date for the change was to be 31 March 1999. This was given the somewhat inappropriate label in the PSA 'Termination Date'. Thus Clause 7.10 provided:-

"After the Termination Date [31 March 1999] the charges payable by the Company to the [BTPA] for Core Police Services shall be based on the estimated total cost but the proportion payable by the Company shall be adjusted having regard to the level of Core Police Services provided for the Company and for third parties in the year immediately preceding 31 March 1999."

The charges review was carried out through an independent firm of consultants with a view to assessing the relevant proportion payable by each TOC having regard to the proportion of the core services used by it. 'Core Services' were defined in the PSAs to mean:-

"… those services undertaken by the [BTP] to maintain law and order and includes (without limitation) services undertaken in relation to safety, anti-terrorism, the prevention and detection of crime, the keeping of the peace, the bringing of offenders to justice and the rendering of support to the victims of crime but do not include the Non-Core Police Services."

The non-core services are additional services including:-

"a) the escort of high value goods

b) the static guarding of any premises or goods

c) the supervision of car parks

and any services which are ancillary thereto."

Non-core services are those which arise from particular services which are not covered by the general duties of the BTP and for which the relevant TOC will pay as and when they arise. Following the 1999 review, the claimants had to pay each year the percentage fixed by reference to the total cost, which would be adjusted – no doubt increased – as the years went by. But the proportions were fixed at 4.05% for South Eastern and 3.31% for Southern. Thus while the amounts payable could obviously increase as the cost of the provision of Core Services rose the percentage based on the 1999 formula could not since by the terms of the PSAs the BTPA could not vary those percentages. Later PSAs do not contain the same provisions. As will be seen when I come to consider the cases of the Interested Parties (IPs) and some of the arguments raised, there are more flexible provisions which are not specifically fixed to the 1999 proportions.

7. The claimants' PSAs can be terminated by either party on giving four years' notice in writing of the intention to terminate. When bidding for a franchise, the TOC has to assess the estimated cost of providing the service. A significant element of such cost is the amount payable for the services of the BTP. Over the lifetime of a franchise they can amount to tens of millions of pounds. Thus the four year notice clause was an important safeguard for the claimants since it provided a period during which the percentage of the total cost was known and so the calculation of cost could not only be more readily made but it was unnecessary to build in extra cost which might arise if the formula was changed within a shorter time scale.
8. The material provisions of the 2003 Act came into force on 1 July 2004. The Act itself was passed on 10 July 2003 and those interested were aware before this of what the government proposed. I shall refer to the relevant statutory provisions in due course, but as a general overview, the Act created the BTPA (s.18) which is obliged to secure the maintenance of an efficient and effective police force, namely the BTP, and to defray its expenses (s.20). There is a small element of public funding and Network Rail, Transport for London and a few other bodies pay some of the costs. The bulk is payable by TOCs. There were shortcomings identified by internal auditors and by HM Inspectorate of Constabulary in the way in which the BTPA's predecessors had carried out their similar functions and in particular it was considered to be necessary to identify how the overall budget had been allocated within the BTP and so to calculate on a fairer basis the proportion to be paid by individual TOCs. In particular, it was apparent that more resources had been deployed in London and the South and South East. In these proceedings, there is no attack on the overall budget. For 2007/8 the total overground budget amounted to £187,000,000 odd (there is in addition a further underground budget: I am not told of the significance of the two, but it is the overground that matters). Of this, some £180,000,000 odd was charged to some 26 PSA holders. Thus the percentages payable by the claimants amounted to sizeable annual sums.
9. It was considered necessary to establish what was thought to be a fairer means of dividing up the cost. To that end, what has been called a new model ('the new model') was developed with the assistance of consultants. This was, following consultation with interested parties including the TOCs, put in place and was applied for BTPA budgeting for the financial year beginning 1 April 2007. An effect of the new model was to vary the percentages payable by some TOCs because of the new formula to be applied which was believed to achieve a fairer reflection of the use made by each TOC of the services of the BTP. Since London and the South and South East had in particular been undercharged on the 1999 model, the claimants have found a significant increase in the percentage and so the amount payable. The same has for some reason not entirely clear to it or to me applied to Arriva which operates in Wales. But others have had their percentages reduced. Whether or not the terminology is entirely appropriate, those who have gained in the sense that they are liable to pay less have been described as winners and those who are liable to pay more losers. The second to fifth interested parties are winners – I shall refer to them as NMF (Mr Fordham's clients) and HEx (Mr Coppel's clients) respectively. Unsurprisingly, Arriva broadly supports the claimants whereas NMF and HEx support the defendant, although the arguments deployed do not altogether coincide.
10. The court has been deluged with a large number of files. I have had to look at a very small proportion of what has been produced. A core bundle ought to have been agreed. Solicitors used to dealing with substantial litigation have been involved and so should have known better. In addition, there had been produced for counsel A5 size bundles. They could have been served on the court; their use in appropriate cases is to be encouraged.
11. BTPA issued invoices to the TOCs in April 2007 based on the new model. They referred to them as being '1/13 of the agreed annual charges for the period' and described them as 'Police Service Agreement charges 2007/2008'. There had been previous correspondence objecting to the use of the new model to which I will have to refer in more detail when dealing with an argument put forward by NMF that delay should result in a refusal to grant relief. The claimants regarded the charges as neither agreed nor properly to be regarded as PSA charges since Clause 7.3 and 7.10 of their PSAs did not allow for the change of the percentages upon which their charges should be based. Their claim was lodged on 29 May 2007.
12. I must now refer to the relevant statutory provisions. I start with the 2003 Act. Sections 33 to 35 deal with PSAs. So far as material, they provide:-

"33. Police services agreement

(1) the Authority may enter into an agreement under this section (to be known as a police services agreement) with any person ('the customer') which provides –

(a) for the Police Force to police a railway or railway property in connection with which the customer provides railway services, in accordance with objectives, plans, targets and directions set under sections 50 to 55,

(b) for the Police Force to provide such additional policing services as may be specified in the agreement, and

(c) for such incidental or ancillary matters as the parties thinks appropriate.

(2) The Authority may not enter into a police services agreement unless a draft is approved in writing by the Secretary of State.

(3) A police services agreement shall include provision requiring the customer to make payments to the Authority, which may be payments of –

(a) specified sums, or

(b) sums assessed in a specified manner (which may include reference to amounts paid, or expected to be paid, by the Authority).

(4) In determining the terms in a police services agreement of provision about payment the Authority shall aim to ensure that-

(a) in each financial year the expenses of the Authority, including those incurred in defraying the expenses of the Police Force, are as nearly as possible equivalent to the income of the Authority, and

(b) the amount of the contribution to the expenses of the Authority made by each customer in a financial year approximately reflects the nature and extent of the functions likely to be undertaken in that year in accordance with the customer's police service agreement.

(5) But subsection (4) does not prevent the Authority from setting a customer's contribution at a level which –

(a) reflects a surplus of income over expenses in a previous financial year (whether or not relating wholly or partly to functions carried out in respect of the customer);

(b) reflects a deficit in a previous financial year (whether or not relating wholly or partly to functions carried out in respect of the customer);

(c) reflects the need to reserve funds for contingencies.

34 Compulsory police services agreement

(1) The Secretary of State may by order –

(a) require a person who provides railway services to enter into a police services agreement;

(b) require each member of a class of persons providing railway services to enter into a police services agreement.

35 Arbitration by Secretary of State

(1) this section applies to a dispute between the Authority and a person who has entered into a police services agreement, where the dispute is about the terms, construction or operation of the agreement.

(2) Either party to the dispute may refer it to the Secretary of State.

(3) The Secretary of State may –

(a) determine the dispute, or

(b) nominate a person to determine the dispute.

(4) The Secretary of State shall determine the procedure to be followed in determining a dispute under this section.

(5) In particular, the Secretary of State or nominated person shall give each party to the dispute an opportunity to make representations.

(6) In determining a dispute the Secretary of State or a nominated person may –

(a) give a declaration about how a provision of a police services agreement is to be construed or operated;

(b) vary the terms of a police services agreement;

(c) determine that one party is obliged in accordance with a police services agreement to pay a specified sum, or a sum to be assessed in a specified manner, to the other party;

(d) make an order about costs.

(7) Where a dispute is determined under this section –

(a) a party may appeal to the High Court on a point of law;

(b) the determination may, with the permission of the High Court, be enforced as if it were a judgment of the High Court (and may, in particular, be enforced by the use of powers in relation to contempt of court)."

The crucial provision in this clause is s.33 (4) (b) since it is that that the BTPA relies on to justify charging on the basis of the new model without seeking to vary or to terminate the existing PSAs.

13. Schedule 4 to the Act contains, via section 18, provisions relating to the BTPA. Paragraph 19 of Schedule 4 requires it before each financial year to 'set a budget of expected expenditure and income for the year' (s.19(1)). Paragraph 20 provides:-

"The Authority shall make an estimate of the likely ratio of customers' contributions in accordance with section 33(4)(b) –

(a) before and in relation to each consecutive period of five financial years; and

(b) at such other times and in relation to such other periods as the Authority think appropriate."

Paragraph 27 enables the Secretary of State to make grants or loans to the BTPA subject to such conditions as he may specify, including, in the case of loans, the payment of interest.

14. Section 73(2) enables the Secretary of State by order to make 'consequential, transitional or incidental provisions or savings, for the purpose of or in connection with a provision of this Part.' The Part in question is that dealing with the BTP and the BTPA. Section 73(3)(i) provides that transitional provisions may include in particular a provision :-

"For dealing with –

(i) the termination of agreements made in respect of the old transport police;

(ii) the treatment of rights and liabilities under agreements made in respect of the old transport police by persons who enter into police services agreements with the Authority (whether or not they are required to do so)."

Section 73(4) provides that an order under s.73(2) may amend an enactment or instrument.

15. The Secretary of State made an order under s.73(2) which came into force on 1 July 2004. It is entitled the British Transport Police (Transitional and Consequential Provisions) Order 2004 (2004 No.1573). The relevant Articles are 4 and 10 which read respectively:-

"4. (1) For the purposes of the financial year beginning 1 April 2004 –

(a) the budget set by the old transport police committee for the financial year beginning 1^st April 2004, in pursuance of its duties in paragraph 4 of the British Transport Police Force Scheme, shall be deemed to have been set by the Authority in compliance with the requirements of paragraph 19 of Schedule 4 to the 2003 Act;

(b) the objectives for policing the railways set by the old transport police committee for the financial year beginning 1^st April 2004, in pursuance of its duties described in paragraph 4 of the British Transport Police Force Scheme shall be deemed to have been set by the Authority in compliance with the requirements of section 50 of the 2003 Act.

(c) The plan setting out the proposed arrangements for policing the railways issued by the old transport police committee for the financial year beginning 1^st April 2004, in pursuance of its duties described in paragraph 4 of the British Transport Police Force Scheme, shall be deemed to have been issued by the Authority in compliance with the requirements of section 52 of the 2003 Act and

(d) The strategic plan for the period 2003 to 2006 issued by the old transport police committee, in pursuance of its duties described in paragraph 4 of the British Transport Police Force Scheme shall be deemed to have been issued by the Authority in compliance with the requirements of section 55 of the 2003 Act.

(2) The Authority shall make its first estimate of the likely ratio of customers' contributions referred to in paragraph 20 of Schedule 4 to the 2003 Act on or before 1^st April 2006.

10. (1) In this article –

(a) "an agreement for police services" means an agreement approved by the Secretary of State with the employer of the old transport police for the provision to the licence holder of services specified for the time being as core services in the code issued by the old transport police committee;

(b) "licence holder" means a person to whom a licence has been granted under section 8 of the Railways Act 1993(b); and

(c) "railways services" has the same meaning as in section 82 of the Railways Act 1993.

(2) An agreement for police services entered into before 1st July 2004 by the Strategic Rail Authority with a person providing railway services shall be deemed to be a police services agreement entered into by the Authority and that person under the provisions of Section 33 of the 2003 Act.

(3) In a licence granted under section 8 of the Railways Act 1993 before the 1^st July 2004 a condition requiring the licence holder to enter into an agreement for police services shall cease to have effect."

Article 10 is of particular importance since the claimants' PSAs (and indeed those of the IPs) are deemed to be PSAs entered into under the provisions of s.33 of the 2003 Act. One issue is to determine the effect of that deeming provision and how if at all it affects the existing terms of the PSAs. It is to be noted that the Secretary of State did not seek to terminate the existing PSAs (as s.73(3)(i)(i) would have permitted him to do) and require that the TOCs entered into new agreements. Equally he did not seek to vary any of the terms in the existing PSAs. Since existing PSAs are deemed to be PSAs entered into under the provisions of s.33, s.73(3)(i)(ii) would have enabled an order to make such variations as might be thought to be sensible. No doubt the terms of existing PSAs were considered and before the Order was made consideration was given to whether any variations were needed. If that did not happen, it should have done. The removal in Article 10(3) of the condition in a licence requiring the licence holder to enter into a PSA results from the provisions of s.33(1) and 34(1) of the 2003 Act. As I have already stated, it is compulsory for a TOC to enter into a PSA.

16. When the 2003 Act came into force, decisions had not been made on outstanding arbitrations which related to the 1999 charges review. The BTPA decided to await these before taking any steps to carry out a review which had to be based on the duties set out in s.33 of the Act. The decisions did not come until March 2005. It is unnecessary to go into any detail; suffice to say that the general approach was approved but some defects in the way it had been applied were identified. The BTPA concluded that the existing 1999 model was not fair overall since patterns of policing activities had changed since 1998/9 and there were added difficulties in assessing charges for PSA holders. In the meantime, the BTPA wrote to the first claimant informing it that the creation of the BTPA would "not affect the terms, conditions, rights or liabilities under the PSA which has been entered by the SRA". Similar letters were sent to all existing PSA holders and each was informed that all PSAs made before 1 July 2004 would be 'deemed as having been entered into with the BTPA and will therefore continue to apply'.
17. The BTPA engaged a firm of consultants, Matrix, to carry out the review. There was consultation with the PSA holders, but it is not necessary to go into the detail of how the review was conducted. Its lawfulness is not challenged in these proceedings nor have I been asked to consider whether there have been any errors or unfairness in the way its conclusions were reached. Similarly, there is no challenge to the new model which has been adopted following the review. But I must make it clear that the lack of challenge in these proceedings is not to be taken as a clean bill of health for the new model. Arriva has exercised its rights to go to arbitration under s.35 of the 2003 Act since its payment terms are not the same as the claimants'. The amount due from it is to be a proportion of the Total Cost (Clause 7.1), but the PSA does not provide specifically how that proportion is to be ascertained. In the arbitration, Arriva is challenging the new model and is in addition arguing that the payment terms in the PSA do not entitle the BTPA to use it as a means of fixing the proportion due from Arriva. This latter argument involves the need to investigate how the payment terms should be construed in the light of what transpired between the parties and so there are issues of fact to be determined and the need for discovery of all relevant documentation before any decision can be reached.
18. Article 4(2) of the Transitional Provisions Order required the BTPA to make its first estimate of the likely ratio of contributions from TOCs by 1 April 2006. This was not done since the decision to apply the new model could not be made by then. It is said that the Department of Transport and the BTPA agreed that the estimate should be deferred until April 2007 since this was an obviously sensible course to adopt. Sensible it may have been, lawful it was not. It cannot be right to ignore a statutory obligation. However, no point is made in these proceedings on that failure to comply with the law.
19. It would obviously have been impossible to make the changes required by the new model at the conclusion of all franchises since TOCs' franchises are of different lengths. Similarly, since there had been nothing in the Transitional Provisions Order which varied the terms of the PSAs nor had they been terminated, the BTPA had concerns about how the charges should lawfully be implemented. The meeting to approve charging based on the new model was held on 24 October 2006. On 16 October the BTPA had written to the Department questioning whether an order could be made terminating existing PSAs and introducing new ones. On 17 November 2006, after the meeting had been held, the Department wrote saying that there was no statutory power enabling the Secretary of State to revoke existing PSAs and he could not order the parties 'to disregard the terms of the current contractual arrangement and imposing a new PSA'. The BTPA should try to obtain voluntary agreements from as many as possible and serve notices of termination on the others. Any such notices would not bring the agreements to an end for four years.
20. At the meeting on 24 October, it was agreed that the new model should be adopted and should form the basis for charging for the financial years 2007/8 to 2010/11. Discussions should be held with the industry 'about the appropriate time frame within which to refresh the data underlying the charging mechanism, including exploring the use of a 3 year rolling average'. Following the meeting, letters were sent to the TOCs dated 26 October. They indicated that an exercise was being undertaken to show what charges the new model would produce for individual TOCs and that representations were being made to the Secretary of State urging him to reconsider his decision not to introduce some form of smoothing arrangements and not to have a fundamental review of the way the Authority secured its funding.
21. Representations were made to the BTPA by the claimants at a meeting on 31 October 2006. There were concerns being expressed about the overall budget and the charging changes. Correspondence followed raising both issues. On 23 January 2007, the claimants' solicitors wrote to the BTPA raising the contractual position. The letter stated:-

"The alteration unilaterally of the way in which the allocation of charges is calculated is, unless agreed, an attempt by you to breach the contract. Its imposition would indeed be a breach of contract – and a serious one.

Our clients have not accepted the re-allocation and do not propose to do so. They believe that they have the contractual right to expect the allocation of costs to continue on the basis hitherto applied unless and until a new agreement has been negotiated, following the appropriate termination of the old agreement.

Is it your proposal to provide four years' notice in writing –if so, when?"

22. It was not until 28 March 2007 that the BTPA through its solicitors sent a substantive reply to the letter of 23 January. This stated that the BTPA was aiming to charge in accordance with the principle reflected by s.33(4)(b) of the 2003 Act and that it 'believes there are public policy grounds which support its decision to charge' on the basis of the new model. It did not deal with the breach of contract argument but did say that there was no present intention to terminate.
23. On 13 April 2007 the claimants' solicitors wrote again pointing out the failure to deal with the contractual argument. This followed invoices of 2 April 2007 which referred to the 'agreed annual charge'. Those invoices followed a meeting of the BTPA held on 6 March 2007. The meeting was told that 'any short-term cash flow issues would be covered by the DfT until the disputes were resolved'. The assumption was that this would be by way of grant. There could have been no doubt that challenges were likely and the DfT did not offer a grant but only a loan. Nor was it likely that the problem would only be short term having regard to the four year termination clause.
24. On 27 April 2007, the claimants' solicitors informed the BTPA's solicitors in writing that a claim for judicial review was to be lodged coupled with an application for interim relief. This was based on alleged improper invoicing leading to a failure to comply with s.33(4)(a) in that a substantial deficit would result. A deadline for reply was set at 2 May 2007. The letter set out in an attached schedule the basis of the claimants' case. A response came on 2 May 2007. It referred to the power of the Secretary of State to vary the terms of an agreement in s.35(6)(b) and suggested that an arbitration was appropriate so that consideration could be given to such variation. It did not suggest that there was any power to override the terms of the PSAs but asserted that judicial review was not appropriate or possible since more than three months had elapsed since the decision of 24 October 2006, which was the relevant decision. The way ahead if there was to be a challenge was arbitration (which of course had no material time limit) and the power of an arbitrator to vary the terms could be exercised.
25. On 29 May 2007 this claim was lodged. On 21 June 2007 the defendants filed an Acknowledgement of Service which contained summary grounds of defence. This put forward an argument which has been central to its case before me but which had not been raised before the claim was lodged that s.33(4)(b) provided a statutory override of the existing contractual terms. Grant of permission was not opposed, the defendants indicating that they would welcome an early determination of the issue raised by the claimants. Notwithstanding this, on 12 July 2007, Mitting J refused permission on the basis that, although the claim raised serious and arguable issues, it was essentially a private law claim to be dealt with either under CPR Part 8 or through arbitration.
26. A renewed application came before Underhill J. He granted permission stating, in my view entirely correctly, that whether the BTPA had by virtue of s.35(4)(b) of the 2003 Act the power to introduce and apply unilaterally a new model was a question of a public law character. No party has sought to argue the contrary. He also gave leave to amend the claim to add a prayer seeking a declaration that:

"Article 10 of the Transitional Order and Section 33(4) do not have the effect of overriding the express charging provisions in an agreement for police services entered into before 1 July 2003 by the SRA with a person providing railway services."

That prayer had not been included in the claim as lodged because the override argument had not been raised.

27. Mr Ross recognised that the BTPA could have terminated the PSAs so that any new agreement could have come into existence as from 1 July 2008. These would have contained charging terms which could have been based on a new model. This was not done because nobody anticipated that there was going to be the problem about the statutory override. Since the argument that there was such an override was not deployed until the claim was lodged and there had been attempts to persuade the DfT to take steps to try to overcome the problems, it rather looks as if no one appreciated that the contractual terms would create a real problem in putting a new model into effect. It seems to have been assumed that any problem could be dealt with by arbitration and the exercise by the arbitrator of the power to vary conferred by s.35(6)(b). I was told that a decision had been made to give notices of termination with effect from 31 March 2009. That will not provide a solution if one is needed until 2013.
28. Mr Ross in his skeleton argument dwelt on the need to apply a purposive construction of the Act. He referred to a number of authorities which expressed this. I do not need to go through them: the principle is of general application. The purpose is that set out in s.33(4). It is there described as an aim. S.33(4)(a) sets out the obvious aim to match income to expenditure and s.33(4)(b) indicates that each TOC should have to pay an amount which as fairly as possible reflects its use of the services of the BTP. But nowhere in the Act is there an indication that this can be achieved by overriding existing contractual provisions. Mr Ross made the point that Parliament was aware of the existence of the PSAs when the Transitional Provisions Order was made and Article 4(2) required an estimate of the likely rates of contributions, which inevitably would have to be based on a new model, by 1 April 2006, just under 2 years after the Act came into force.
29. While I accept that Parliament must be taken to have been aware of the terms of the PSAs (I do not need to go into the material relied on to support that assertion; it has not been disputed), there was nothing in the Order to vary the terms of the PSAs. Quite the contrary since the existing PSAs were deemed to have been made under s.33 of the 2003 Act and so their provisions were maintained: see Article 10(2) of the Transitional Order. In reality, s.73 does not support Mr Ross's argument. It enabled the Secretary of State to vary the terms of or to terminate existing PSAs. He decided not to do so. He could have achieved what the BTPA desired by such termination or variation, but the existence of the power suggests that that was the only means by which existing contractual rights could be overridden. Furthermore, it would in my view require clear words to show that Parliament had intended to and had overridden existing contractual rights.
30. Section 33(4) provides for an aim; it does not, perhaps for obvious reasons, impose an obligation to achieve what s.33(4)(a) and (b) set out. Article 4(2) of the Transitional Order requires no more than an estimate of the likely ratio of contributions by 1 April 2006. Neither the Act nor the Order sets out the means whereby the aim is to be effected. The SRA could have been requested to terminate existing agreements when the 2003 Act was enacted so that the four years began to run from July 2003. It would have been possible to do so earlier in contemplation of the Act once it came into existence as a Bill. At least it could have been done in July 2004.
31. Mr Ross submitted that a purposive construction of s.33(4) would grant the BTPA the necessary power. He would construe 'determining' in s.33(4)(b) as meaning 'construing'. Thus the BTPA was given the power to determine what the terms of the agreement were and could therefore decide that the proportion referred to in Clause 7 must relate to the new model since only thus could the requirement that it reflected the nature and extent of the functions likely to be undertaken in that year by the BTP be met. This goes beyond construction since the provisions of Clause 7.3 could not sensibly be construed to achieve that result. It involves an ex post facto determination overriding the provisions of the agreement.
32. Section 33 is concerned with agreements to be entered into under the 2003 Act. Section 33(1) makes that clear. Since s.33(2) requires the Secretary of State's consent, it is apparent that the BTPA must have the whip hand in identifying the terms to be included in a PSA. Thus in context 'determining' in s.33(4)(b) refers to the setting of the terms. The Authority must decide what terms are necessary to achieve the aims set out in s.33(4). It has nothing to do with deciding what should have been included so as to enable the Authority to make a determination by imposing a construction which the words of the clause cannot sensibly bear.
33. I of course accept that the BTPA had to aim to achieve the objectives set out in s.33(4). It believed (and I do not doubt the reasonableness of this belief) that a new model was needed since the existing 1999 model was not able to achieve the aim set out in s.33(4)(b). There can be no doubt that s.33(4)(a) was achieved since under that model there was a full payment of the expenditure. The only problem was that it was believed that the proportions payable by the TOCs were not fair and so did not accord with the aim in s.33(4)(b). Unfortunately, the BTPA did not terminate the existing PSAs and start again. It sought to get agreements to the introduction of the new model. Not surprisingly, those who benefited or whose contributions remained unchanged were prepared to agree whereas those three (the claimants and Arriva) who would have to pay substantial additional amounts did not.
34. Mr Ross relied on Stansell Ltd v Cooperative Group (CWS) Ltd [2006] 1 WLR 1704. That was a case in which existing contractual rights were, he submitted, overridden despite the existence of no clear power to do so. The relevant statutory provision in that case (s.51(1) of the Industrial and Provident Societies Act 1965) conferred a power on a registered society to transfer its business undertakings by special resolution to another registered society. Since the clear purpose of the legislation was to enable a transfer to be effected, the Court of Appeal decided that it must override a contractual provision prohibiting assignment of the benefits of a contract without consent. The statutory provision must be construed in accordance with its clear terms and in order to give it effect it had to override the relevant provision. That is very far from the position here. The terms of s.33(4) cannot on their natural meaning have the effect for which Mr Ross contends nor is an override of the existing terms necessary in order to achieve their purpose.
35. Mr Coppel on behalf of HEx put forward two further arguments. He referred to s.35 and the use of the word 'determine' there in the sense that the Authority wanted to apply in s.33(4). But s.35 is dealing with the powers of the Secretary of State or an arbitrator carrying out a judicial function. The context is entirely different and gives no help to the true construction of the word in s.33(4). Mr Coppel further submitted that the determination of terms should, after the 2003 Act came into force, extend to any amendment of existing agreements. If the Authority could determine the terms of new agreements in order to ensure compliance with the aims set out in s.33(4), it would not do violence to the wording of the subsection and would be consistent with its purpose to extend its application to determination of the appropriate terms in existing PSAs. He submits that determining the terms at the outset of an agreement is the same as determining them during the currency of the agreement if such determination is needed in order to comply with the aim set out in the subsection. I do not accept this submission. Mr Coppel still has the difficulty that he is seeking to identify a power to override existing contractual arrangements when no such power is explicitly conferred. Whether or not determining can be said to have the suggested meaning, the subsection does not extend it to enabling the Authority to impose new terms to the detriment of the TOC in question unilaterally.
36. There is in my judgment no power to override the existing agreements. A variation must be agreed to have any possible effect. The claimants and Arriva did not agree and so it follows that the attempt to impose the new proportions was, in the claimants' cases, not in accordance with the clear terms of their agreements and so unlawful. Unless Arriva's different terms permit the variation, which is a matter at issue in the arbitration, the same result would follow for it. The Authority cannot require the claimants to pay more than the percentages applicable by virtue of the 1999 model until their present PSAs are terminated or they agree to any variation. It follows that the invoices submitted do not have to be paid in full. While it is not necessary to set out the full sums involved, they run into £millions. The same applies in reverse to NMF. HEx under the old model paid some £500,000 per annum; that has been reduced to about £87,000.
37. The suggestion made in the response to the letters sent before the claim was lodged that the claimants should go to arbitration to enable the arbitrator to vary the terms if they thought it right to do so was somewhat faintly pursued. It was suggested that the BTPA could itself seek arbitration concerning its imposition of the new model. Resort to arbitration is only permitted where there is 'a dispute between the Authority and a person who has entered into a Police Services Agreement … about the terms, construction or operation of the agreement'. So far as the claimants are concerned, there is no such dispute. The only matter in issue is whether the Authority has the power to override the terms of the agreement. That is a matter which is to be decided by the Administrative Court. Since I have decided that there is no such power, there can be no dispute which can be put to an arbitrator. The Authority cannot itself create a dispute by seeking to impose an obligation which the agreement does not provide for and which it has no power to impose. Thus the arbitration route to possible variation is not available.
38. The interested parties have supported (in the case of Arriva) the claimants or (in the case of the others) the Authority. But each has been concerned that I do not grant any relief or reach any conclusions (beyond the only ones essential to determination of the claimants' case) which could directly affect them. Mr Ross is anxious that I should decide on as many matters as possible to avoid further litigation and contests in arbitration proceedings. The other parties would limit me to necessary decisions for the purpose of the claimants' case only.
39. Mr Pleming on behalf of Arriva is concerned that I should not seek to decide on the construction of Arriva's payment clause since that is in issue in the arbitration. He makes the powerful point that such a decision will, as I have already said, depend on evidence which is not before me. I agree and Mr Ross did not in the end press me to reach such a decision. I simply make the obvious point that unless Arriva's terms are such as to enable the proportion payable by it to be varied so that the new model can be imposed (or such new model as the arbitrator finds to be appropriate) the submission of invoices based on the new model cannot be justified. It may, I suppose, be argued that, once the matter is before the arbitrator, he has power to vary the term to meet the new model. That argument, if raised, will have to be dealt with by the arbitrator. I make no decision upon it.
40. Mr Pleming added to the claimants' case the submission that to impose the new model would create an unlawful state aid. This was because the winners would be paying less and the losers more so that the basis upon which they all bid for their respective franchises was changed and the winners received an unfair advantage. The Authority as a state organ would be using its powers to release a commercial undertaking from an obligation to pay a sum due. In the tendering process, the assessment of the amounts payable for the services of the BTP form an important element and the pricing mechanisms ought, it is submitted, to be the same. A waiver of the four year notice of termination requirement would give an advantage to the winners and give them a windfall which neither they nor the losers had reckoned with in their tendering process. This would, it was said, distort competition.
41. It was suggested that this may have influenced the Secretary of State not to terminate or vary the terms of the PSAs in the Transitional Order. I do not know whether there is anything in that suggestion. Certainly I have no evidence about it. I have not heard any detailed argument on the issue. No other party was prepared to argue in support of this submission, but that does not of course mean that it should not prevail. I confess that I myself had considerable doubt whether it was a valid argument, since the fact that a particular action may benefit some and disadvantage others does not necessarily mean that there is state aid (see British Aggregates Assn v HM Treasury [2002] 2 CMLR 1281). However, it is not necessary to reach a conclusion now and I do not do so.
42. Mr Fordham does not support Mr Ross's and Mr Coppel's submissions that s.33(4)(b) confers a power to override. He contends that there has been an agreement to vary the terms of his clients' PSAs so that they are only liable to pay in accordance with the new model. Such variation is, he submits, clearly permitted by the terms of the agreements. These terms are, with one exception, identical. A typical Clause 7.7 provides:-

"Subject to sub-clause 7.8 and Clause 11 any change in the terms of this agreement which is agreed by the Board and the Company shall take effect as soon as reasonably practicable after such agreement and a financial statement containing details of the estimated charges revised in accordance with such change shall be produced within a reasonable time of such agreement."

Clause 7.8 requires particular steps to be taken if any changes are to result in redundancies and Clause 11 requires the approval of the Secretary of State if there is to be any amendment of the definition of Core or Non-Core Police Services. The exception is that in the more recent PSAs it is provided that any variation must be agreed in writing.

43. Mr Pleming, supported by Mr Sharpe, submitted that no variation could be effected after the coming into force of the 2003 Act unless approved by the Secretary of State. This was because of s.33(2), which would apply to a variation as well as to a new agreement since a variation was itself a new agreement. Mr Ross suggested that prior to the 2003 Act the Secretary of State's consent was required but he was unable to show me any statutory provision having that effect. He promised to research the point after the conclusion of the argument and he has submitted a note about it. This follows contact with the DfT. The information received was that there was no statutory provision so far as the individual responding was aware (and one has not been discovered by anyone) but that the Secretary of State did require that he approved any PSA. Whatever may have been the position on entering into an agreement, its terms are inconsistent with the need to obtain the Secretary of State's consent for a variation. In particular, the requirement for specific approval of an amendment referred to in Clause 11 presupposes that no such approval is required for other amendments.
44. Section 33(2) requires approval by the Secretary of State for a PSA entered into under the 2003 Act. Article 10(2) of the Transitional Order deems an existing agreement to be a PSA entered into under s.33. Thus it is deemed to have the consent of the Secretary of State and it would be extraordinary if before making the Order those responsible had not familiarised themselves with the terms of those PSAs. The deemed consent must in the circumstances cover all the Clauses including those which permit a variation without express consent being required. Thus if there was an agreed variation, it is valid without the need for any express consent from the Secretary of State.
45. NMF's case is that for each of them there was such an agreed variation. The fact that the invoices used the word 'agreed' is unfortunate, to say the least, if the Authority did not intend to agree a variation. Whether there was in fact such an agreed variation may depend on factual issues and the need to construe any relevant communications between the parties. I have not considered the factual issue since, for reasons which will become apparent, it is not necessary for me to do so.
46. If there was an agreement to vary each of NMF's terms to reduce their contributions, that was only effected because the Authority believed that it was entitled to vary all TOCs' contributions in accordance with the new model. That they could not do unilaterally. In those circumstances, the variations were tainted with the illegality of charging the claimants and (subject to what I have said in Paragraph 39) Arriva. Thus the variations were themselves unlawful. In classic Wednesbury terms, they were entered into following a failure to have regard to a material consideration, namely the inability lawfully to charge the losers more. Thus to reduce the contributions from NMF and HEx would mean that the full cost could not be met and s.33(4)(a) could not be complied with.
47. Mr Fordham submitted that such unlawfulness could not affect contractual obligations entered into by the Authority if the effect would be to the detriment of the other party. He recognised that contracts which were entered into by public bodies which were ultra vires were void and so their terms were unenforceable against or by the public body: see Hazell v Hammersmith & Fulham LBC [1991] 1 All ER 545 (the interest swap litigation). In Structadene v Hackney LBC [2001] 2 All ER 225, Elias J set aside a contract which had been entered into by the authority unlawfully because it had failed to take proper steps to obtain the best value for the sale of the land in question and had failed to obtain the Secretary of State's consent. Mr Fordham submitted that it was only if the public body had exceeded its lawful powers that a contract could be declared to be of no effect.
48. I see no good reason for the suggested limitation. An irrational act (to use the term as defined by Lord Diplock in the CCSU case) is unlawful and so if that act is the entering into of a contract that contract cannot be valid. The usual public law requirement that action is taken to set aside the contracts within at most 3 months will prevail, but, following the principles laid down by the House of Lords in Wandsworth LBC v Winder [1984] 3 All ER 976, it would be possible for a party to raise the unlawfulness as a defence to a claim based on the contract. Mr Fordham has to recognise that in R(TGWU) v Walsall MBC [2002] ELR 329 a decision to enter into a contract was quashed and the contract declared void and of no effect because of procedural improprieties in the decision. It follows that the variation in favour of NMF cannot be valid.
49. Mr Fordham submits further that there has here been delay which should result in no relief being given, whether by declaration or otherwise, which could affect his clients' position. Since the defendants have not relied on delay to prevent permission being granted, Mr Fordham recognises that he must rely on s.31(6) of the Supreme Court Act 1981. This provides:-

"Where the High Court considers that there has been undue delay in making an application for judicial review, the court may refuse to grant …

(b) any relief sought on the application, if it considers that the granting of the relief sought would be likely to cause substantial hardship to, or substantially prejudice the rights of, any person or would be detrimental to good administration. "

This applies to any person affected by the subject matter of a claim and the failure by a defendant to take a delay point cannot prevent a third party from doing so. It is obvious that the third party can only prevent relief being granted if that relief would directly affect his interests in a manner referred to in s.31(6).

50. In this case, as Mr Fordham recognises, my decision will inevitably mean that the variation which benefited his clients will be affected. Since I have decided that it was unlawful for the Authority to have agreed (if it did) the variation, that decision will exist whether or not a formal declaration is granted. Furthermore, if the claimants had decided not to claim judicial review but simply to await being sued by the Authority following their refusal to pay the extra amounts resulting from the new model, they could have raised the unlawfulness as a defence to that claim following the Winder case. Thus to take the delay point is in the circumstances of no benefit to Mr Fordham's clients. I do not, subject to submissions from counsel, think that it is necessary to make any specific declaration of the validity of the variation, if one was agreed. The reasoning in this judgment speaks for itself. Further, I recognise that there may be arguments available to NMF that they had a legitimate expectation conveyed in October 2006 that they would be charged at a lower rate and it would be unfair and unlawful to require them now to revert to their previous level of contribution. Whether those or any similar arguments are likely to prevail I do not know since I do not have the material before me to enable me to judge them nor have any possible arguments been formulated.
51. In any event, I am not persuaded that there was undue delay. The decision of 24 October 2006 was immediately challenged by the claimants (and some other TOCs). It was then hoped that the Authority would not implement it to the detriment of the claimants. Mr Sharpe submits that it was a decision to act and the unlawful act itself did not take place until the invoices claiming the additional amounts were sent. He relies on the principle set out in R(Burkett) v Hammersmith & Fulham LBC [2002] 1 WLR 1593. However, in that case the resolution in question was to grant planning permission subject to the Secretary of State not calling the question in and there being a satisfactory s.106 agreement. Thus the resolution might not have been put into effect. Here, there were no such conditions. However, it was not unreasonable for the claimants to believe that they might prevail upon the Authority to change their approach. Furthermore, it was not apparent until the invoices were sent that the Authority would seek to levy charges which were, as the claimants rightly believed, unlawful.
52. Thus it was that in the letter of 23 January 2007 the claimants' solicitors raised the unlawfulness argument. The Authority did not answer this argument; the letter of 28 March 2007 was no answer. Then came the invoices and the claim was lodged, following a clear warning that it was coming, some 7 weeks later. Section 31(6) refers to undue delay and the adjective must be given its due weight. While earlier action could have been taken, I do not think that in all the circumstances the delay amounted to undue delay.
53. The prejudice relied on is referred to in a statement on behalf of Northern and Merseyrail (NM). Since 1 April 2007, the new model payments have totalled some £9 million less than the old model. If that sum now has to be repaid, dire consequences would follow. NM have been aware of this claim since 2007 and could have made allowances for a possible success by the claimants. They had, after all, tendered in the expectation that any variation would not be possible unless 4 years elapsed. While I recognise that they have taken advantage of the lower charges and would suffer if they had to pay the extra due from them were their charges for the period since 1 April 2007 now recalculated by reference to the fixed proportions due from them under their PSAs, I do not think this is prejudice within the meaning of s.31(6) since they could and should have made allowances for the possible success of this claim. Thus I am not prepared to find in their favour in the terms of s.31(6).+
54. NMF and HEx have submitted (and the Authority also submits) that in due course, even if they have to wait for 4 years, the sums due based on the new model can be recovered or 'clawed back' from the claimants and Arriva. They rely on s.33(5). The singular includes the plural so that the reference in s.33(5)(b) to a deficit in a previous financial year should be read as extending to deficits in previous financial years. Since, they submit, the deficit has been created by their attempt to comply with the provisions of s.33(4)(b), it is appropriate to recover any sums which could, had they gone through the correct procedure, have been levied.
55. The purpose of s.33(5) in context is clear. Contributions are based on prospective budgets for the following financial year. Those may turn out to have been too high or too low. There may be unforeseen expenses. Thus the need to enable the position to be regularised in a subsequent year is obvious. It is mainly aimed at the situation caused by s.33(4)(a). It is not in my view apt to deal with a deficit created by the failure of the Authority to act lawfully in the manner in which it levied contributions so that the deficit was created by its own fault. That would be a strange reading of such a provision.
56. It is clear that the Secretary of State must be involved in sorting out the unfortunate result of the manner in which the Authority has acted. It is to be noted that in any case the effect of an arbitration might be that full contributions were not provided in a given year. Thus the existence of a deficit at least for a time is not something which is necessarily particularly unusual. No doubt sometimes s.33(5) can assist. Otherwise, a loan or a grant may be needed and the repayment of any loan may be included as part of the total cost to be shared out equitably in subsequent years. The suggested claw back would indeed be to impose through the back door what could not be imposed through the front door and would mean that the unlawful actions of the Authority would in the end prevail.
57. I am inclined in the circumstances to limit relief to a declaration in the terms of the amendment approved by Underhill J. But, as I indicated in the course of argument, I will entertain submissions from counsel as to any other declarations I might make once they had seen this judgment.