England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Rolls Building, Royal Courts of Justice 7 Rolls Buildings, Fetter Lane London, EC4A 1NL
		04/03/2016

Mr Justice Newey :

1. For decades, the defendant, the London Borough of Southwark ("Southwark"), has collected from many of its tenants, including the claimant, Miss Kim Jones ("Miss Jones"), charges for water and sewerage services supplied to the properties by Thames Water Authority or, later on, Thames Water Utilities Limited. The question raised by the present case is whether the Water Resale Order 2006 ("the 2006 Order") applies to these arrangements and, if so, whether Southwark has charged tenants more than was permissible under the 2006 Order. The point is of considerable importance both because Southwark has numerous tenants who could be affected and because it could have implications for other landlords. It turns in part on whether Southwark has been acting as an agent or is, rather, to be seen as having bought and re-sold water and sewerage services.

Narrative

2. Southwark is one of the largest social landlords in the country, owning about 52,000 residential properties. Some 37,000 of them are tenanted and not fitted with a water meter. One of these, Flat 110 Castlemead, 232 Camberwell Road ("Flat 110"), has since May 1981 been let to Miss Jones under a weekly tenancy.
3. Miss Jones' rent card for 1982-1983 records that she had to pay Southwark sums in respect of rent and "rates". By the following year, her rent book referred to two species of rates: general rates and water rates. Since then at least, Miss Jones has paid Southwark for water and sewerage services to Flat 110.
4. Miss Jones will initially have been supplied with water and sewerage services by Thames Water Authority, one of 10 regional water authorities established by the Water Act 1973. Miss Jill Jones, who began working for Thames Water Authority in 1977, explained in evidence that direct billing of water charges was introduced from 1978. Before then, Miss Jill Jones said, water charges had been included with general rates.
5. In 1989, the water industry was privatised under the Water Act 1989 and the water supply and sewerage functions of water authorities were transferred to commercial water and sewerage undertakers. Thames Water Utilities Limited ("Thames Water") succeeded Thames Water Authority.
6. A letter from Thames Water to Southwark of 7 June 1991 dealt with what was described in the heading as "commission for collection of water service charges". Thames Water informed Southwark that rates payable in respect of "Commission (including bad debts)" and "Voids" were to be changed to 15% and 5% respectively. Southwark was told, too, that the rates would be increased retrospectively to 12.5% and 5% for the year ended 31 March 1991.
7. There was also reference to "commission" in a report prepared for Southwark's housing committee by its director of housing in December 1999. The report stated:

"Interim settlement with Thames Water for a 3% increase in agency commission payable to Southwark for the collection of water charges w.e.f 2000/01. Further negotiations may generate additional income over the medium term or lead to a possible cessation of the agency agreement."

8. On 6 March 2000, Thames Water and Southwark entered into an agreement ("the 2000 Agreement") that is central to the issues I have to decide. Thames Water and Southwark were referred to in the agreement as, respectively, "the Provider" and "the Customer". Recitals to the agreement explained that Thames Water "provides water and sewerage services ('the Services') to premises ('the Premises') managed by the Customer in its capacity as Local Housing Authority" (recital (2)) and that Thames Water and Southwark had agreed that the latter would "pay for the Services in respect of some of the Premises" in accordance with the agreement. The body of the agreement then began as follows:

"1 Premises Affected

1.1 THIS Agreement covers all of the Premises where the water supply given by the Provider is not measured by a meter ('the Unmeasured Premises').

2 Liability For Charges

2.1 THE Customer shall pay for all of the Provider's charges ('the Charges') in respect of the Services provided to the Unmeasured Premises.

2.2 THE Charges will be raised by applying the relevant tariffs ('the Tariffs') for the Services, less the allowances and reductions to which the Customer is entitled under Clause 3.

2.3 THE Tariffs will be those that are in force at the relevant time by virtue of inclusion in Charges Schemes made by the Provider under Section 143 of the [Water Industry Act 1991].

3. Allowances and Reductions

3.1 THE Tariffs will be reduced by 5% in recognition of the fact that in any given year a number of the Unmeasured Premises are likely to be unoccupied for a period of less than three months.

3.2 FOLLOWING the deductions under Clause 3.1 the balance of the Charges will be reduced by a further 18% by way of the Customer's commission."

9. Subsequent clauses of the 2000 Agreement dealt with, among other things, the mechanics of invoicing and payment (clause 4), the provision to Thames Water by Southwark of information about "Long Term voids" (i.e. "Unmeasured Premises that have remained unoccupied for a continuous period of three calendar months or more") and "additional Unmeasured Premises acquired and/or disposed of by the Customer" (clause 5) and end of year reconciliations (clause 6). I should, perhaps, set out in full clause 4.6, which was in these terms:

"THE Customer shall send the Provider an invoice … in respect of any Value Added Tax that is payable in respect of the Customer's commission referred to in Clause 3.2."

10. In accordance with the 2000 Agreement, the practice has been for Thames Water to bill Southwark for the water and sewerage services supplied to "Unmeasured Premises". By way of example, a bill dated 22 February 2005 was for a total of £446,801.28, to be paid in ten instalments. The £446,801.28 represented £573,557.48 less "adjustments" amounting to £126,756.20 in respect of "Void allowance" and "Collection commission". The bill appears to have been sent together with a 358 page print-out detailing the charges for each of the relevant properties. The total for Flat 110 was put at £253.68.
11. Mr Ian Young, Southwark's departmental finance manager for housing and modernisation, said this in a witness statement about such "adjustments":

"The sums that Southwark pays to Thames Water are offset … by two amounts.

a. First, the charges are reduced by 5% to reflect the proportion of properties which are estimated to be empty, as no sums are due to Thames Water in respect of those properties. This is known as the 'voids' allowance. I am informed by my former colleague Patrick Fallon (Subsidy and Technical Accountant at the Council until 31 July 2015) that, although the void rate is theoretically intended to reflect the actual number of voids, it has not been reduced to reflect the decreasing level of void properties in recent years, which now stands at about 1.35%.

b. Secondly, Thames Water pays the Council a commission in return for its services collecting these sums and the fact that the Council takes on the risk of non-payment by the occupier. It also takes on the costs of collection and of enforcement where a tenant fails to pay, and deals with billing queries and complaints…. This arrangement is obviously of significant commercial benefit to Thames Water, and the Council has negotiated a commission in return for taking on these costs and risks: currently this is 18% of the total billed by Thames Water, after deduction of the 'voids' allowance."

The "commission" and "voids allowance" represent, Mr Young explained, an important source of funding for Southwark.

12. None of Southwark's tenants is meant to be charged more than the rates set in the charges schemes that Thames Water negotiates with Ofwat, its regulator. It seems that this principle has been breached on occasions because Thames Water and Southwark were using different rateable value figures. That was not, however, the intention of either Thames Water or Southwark. Mr Young said in cross-examination:

"we would strive to charge whatever Thames tell us, notwithstanding the discrepancies that we've uncovered".

13. In 2010-2011, a Mr Roy Ofogba, against whom Southwark had brought possession proceedings, alleged that it was acting as a "Re-seller" of water for the purposes of the 2006 Order. The argument was rejected in the County Court (on 24 November 2011) and an appeal was compromised (by way of a Tomlin order dated 12 December 2012). However, the case had prompted Southwark to review its arrangements with Thames Water. In a report dated 24 August 2011, Mr Young, whose job title was at the time "Head of Housing Finance", said this about the subject:

"Due to the complexity of the [Ofogba] case, Counsel was engaged to advise on this matter. The imperative at this point is to reduce the council's potential exposure to legal challenge and financial loss (notwithstanding the outcome of current litigation). Counsel's advice is that in the long term the [2000] Agreement be terminated and a new Agreement entered into. However, in the interim the council proposes to enter into a Deed of Clarification to the Agreement, which clarifies the council's position as an agent for Thames Water rather than being a 'water reseller' as defined by the Water Industry Act 1991 and Water Resale Order 2006. Thames Water is aware of the legal challenge the council faces and have agreed to facilitate the proposed amendment. This clarification is technical in nature and will not result in any material change to the arrangements with Thames Water."

14. Eventually, Thames Water and Southwark entered into a deed of clarification and amendment dated 23 July 2013 ("the 2013 Deed"). This provided for the 2000 Agreement to be clarified and amended in a number of respects. It is common ground that, if the 2013 Deed is effective, Southwark has not since been a water re-seller. Miss Jones contends that the 2013 Deed is invalid because Southwark failed to follow its "key decision" procedures and to consult its tenants under section 105 of the Housing Act 1985. As, however, Thames Water stands to be affected by any ruling on the 2013 Deed but is not a party to these proceedings and has not agreed to be bound by their result, I have adjourned that aspect of the case.
15. Miss Jill Jones explained that Thames Water has what she called "commercial agency arrangements" in place with 69 local authorities and housing associations. These arrangements, she said, cover some 375,000 properties.
16. Miss Jill Jones summarised her perception of such arrangements in these terms in her witness statement:

"The purpose of these arrangements is to enable [Thames Water] to collect charges from tenants in a more efficient way. The water charges are determined by [Thames Water]. The LA [i.e. local authority]/HA [i.e. housing association] then acts as an agent collecting those water charges, and also assuming the risk for any bad debt. [Thames Water] pays a commission to the LA/HA in exchange for its providing this service, and provides a void allowance intended to account for empty properties."

The legislative framework

The Water Industry Act 1991

17. The key statute in the present context is the Water Industry Act 1991 ("the WIA"). As its long title indicates, the WIA was intended "to consolidate enactments relating to the supply of water and the provision of sewerage services, with amendments to give effect to recommendations of the Law Commission".
18. Under the WIA, water and sewerage undertakers are required to provide (as the case may be) water supply and sewerage systems (see sections 37 and 94). A "domestic supply duty" is, moreover, imposed on water undertakers. This obliges a water undertaker to supply water to premises to which water was supplied before 1 September 1989 or in respect of which a demand for a supply of water has been made (see section 52). By virtue of section 54, this duty is owed to the "consumer", a term defined in section 93 as follows:

"'consumer', in relation to a supply of water provided by a water undertaker to any premises, means … a person who is for the time being the person on whom liability to pay charges to the undertaker in respect of that supply of water would fall".

19. Chapter I of Part V of the WIA deals with charges for water and sewerage services. Section 142 states that the powers of every relevant undertaker are to include power to fix charges (section 142(1)(a)) and "to demand and recover charges fixed under this section from any persons to whom the undertaker provides services or in relation to whom it carries out trade effluent functions" (section 142(1)(b)). These powers are exercisable by or in accordance with a "charges scheme" made under section 143 or "by or in accordance with agreements with the persons to be charged" (subject, in the case of a dwelling, to any agreement having been made before 1 April 2000) (see subsections (2) and (2A)).
20. Section 144(1) of the WIA states that, subject to the following provisions of the section and "except in so far as provision to the contrary is made by any agreement to which the undertaker is a party", supplies of water and sewerage services are to be treated for the purposes of Chapter I of Part V as provided to the occupiers for the time being of relevant premises. There was also reference in the course of argument to subsection (8), which states:

"(8) Where, in the case of any premises—

(a) the person who was liable, immediately before 1st September 1989, to pay charges in respect of a supply of water to those premises was the owner of those premises, rather than the occupier;

(b) that person was so liable (under section 54 of Schedule 3 to the Water Act 1945 or any other local statutory provision) otherwise than by virtue of an agreement; and

(c) the person who was in fact the occupier of the premises on that date has not ceased to be the occupier before the coming into force of this Act,

then the person who is the owner from time to time of those premises shall continue, until the person mentioned in paragraph (c) above does cease to be the occupier of the premises, to be the person liable and, accordingly, shall be treated for the purposes of this section as if he were the occupier of the premises."

21. Section 150 of the WIA empowers Ofwat to make orders fixing the maximum charges which a person who is not a water or sewerage undertaker may recover from a third party in respect of water supplies or sewerage services provided to the third party with the help of services provided by a relevant undertaker. Where someone has paid more than such a maximum charge, the excess is recoverable pursuant to subsection (5).
22. Two further definitions can be noted. First, for the purposes of Chapter I of Part V of the WIA, "consumer" is defined as "a person who is for the time being the person on whom liability to pay charges to the undertaker" in respect of the relevant services would fall (section 150B). Secondly, section 219 provides for "customer or potential customer" to mean:

"(a) any person for or to whom that company [i.e. a company appointed as a water or sewerage undertaker] provides any services in the course of carrying out the functions of a water undertaker or sewerage undertaker (other than a licensed water supplier); or

(b) any person who might become such a person on making an application for the purpose to the company".

The Water Resale Order 2006

23. The 2006 Order was made under section 150 of the WIA. It replaced an earlier order, the Water Resale Order 2001.
24. Of central importance in the present context is the definition of "Re-seller" given in paragraph 5 of the 2006 Order. That states:

"'Re-seller' means any person who is not a Relevant Undertaker but who

(a) provides to any Purchaser a supply of piped water which a Water Undertaker has supplied, directly or indirectly, to the Re-seller; or

(b) provides to any Purchaser a sewerage service which a Sewerage Undertaker has supplied, directly or indirectly, to the Re-seller, but does not include any person who uses any Relevant Pipe belonging to any Water Undertaker to transport water already belonging to that first person from a point of connection on any Water Undertaker's supply system."

The same paragraph defines "Purchaser" as "a person who occupies any dwelling and who buys from a Re-seller any water or sewerage services".

25. Paragraph 6 of the 2006 Order imposes maximum charges on re-sellers. As regards unmetered premises, it says this (in paragraph 6(2)):

"(a) If the Purchaser's water supply is not metered, the charge for that supply shall not exceed the average bill for a water supply (and, if appropriate, sewerage service) payable by the Relevant Undertaker's own domestic customers, as from time to time published by the Director, unless the Re-seller can show that a higher charge is justified in accordance with part (b) of this sub-paragraph, sub-paragraph (c) of this paragraph or with paragraph 8 below, as the case may be.

(b) Without prejudice to part (a) of this sub-paragraph if a Purchaser's water supply is not metered, the maximum charge must be calculated as follows:

(i) first, any amounts recoverable either under sub-paragraph (1) above or from any other person supplied must be deducted from the amount payable by the Re-seller to the Relevant Undertaker or licensed water supplier;

(ii) secondly, the amount still to be recovered after performing the deduction required by sub-paragraph (b)(i) above shall be apportioned –

(aa) equally among the Purchasers to whom this sub-paragraph applies; or

(bb) in proportion to the respective –

(1) rateable values of each of the affected Purchasers' dwellings;

(2) square footages of each of the affected Purchasers' dwellings;

(3) the number of occupants in each of the affected Purchasers' dwellings;

(4) the number of bedrooms in each of the affected Purchasers' dwellings; or

(cc) by calculating one half of the charge in accordance with the method stated in subparagraph (b)(ii)(aa) above and the other half in accordance with any one (but only one) of the methods set out in sub-paragraph (b)(ii)(bb)(1) to (4) above."

26. Paragraph 8 of the 2006 Order allows for the addition of modest administration charges.

The parties' cases in brief summary

27. Mr Martin Westgate QC, who appeared for Miss Jones, argued that, unless and until varied by the 2013 Deed, the 2000 Agreement involved Thames Water supplying Southwark with water and sewerage services and Southwark's tenants, including Miss Jones, in turn buying such services from Southwark. Southwark was hence, Mr Westgate submitted, a "re-seller" within the meaning of the 2006 Order. That conclusion (so Mr Westgate said) is reinforced as regards the period from 1 April 2002 to 31 March 2010 by the fact that successive charges schemes served to deem Southwark to be the "occupier" of the relevant premises and so liable to Thames Water for water and sewerage charges. The result, according to Mr Westgate, is that Southwark was not entitled to recover from its tenants more than the maximum charges set by paragraph 6 of the 2006 Order and both the 18% "commission" and the 5% "voids allowance" had to be taken into account when calculating those charges. Miss Jones has thus, it was contended, been overcharged for the water and sewerage services she has received.
28. In contrast, Mr Charles Bourne QC, who appeared with Miss Hannah Slarks for Southwark, maintained that Southwark has neither bought any water or sewerage services from Thames Water nor re-sold any to its tenants. On its true construction, Mr Bourne said, the 2000 Agreement operated to make Southwark an agent of Thames Water, not for it to purchase water and sewerage services from Thames Water, and the charges schemes did not alter that position. In any case, Miss Jones would not have been overcharged even if the 2006 Order were in point.

Issues

29. The issues that arise can, I think, be conveniently considered under the following headings:

i) The impact of charges schemes;

ii) The 2000 Agreement; and

iii) Maximum charges.

The impact of charges schemes

30. Although the issues were debated in a different order during submissions, it is helpful, I think, to begin by considering the impact of Thames Water's charges schemes.
31. As already mentioned, section 142(1) of the WIA empowers Thames Water to demand and recover charges "from any person to whom the undertaker provides services or in relation to whom it carries out trade effluent functions" and, under section 144(1), water and sewerage services are to be treated as provided to "the occupiers for the time being" of the relevant premises except in so far as may be provided elsewhere in section 144 or "by any agreement to which the undertaker is a party". It is not suggested that any of the later subsections of section 144 affects the position in the present case. On the face of it, therefore, unless there is a relevant agreement to the contrary to which Thames Water is a party, water and sewerage services to tenanted properties are to be viewed as provided to the tenants (as their "occupiers"), with the result that Thames Water can charge the tenants.
32. However, section 142(2) of the WIA states the powers conferred on undertakers by section 142(1) are to be exercisable by or in accordance with "agreements with the persons to be charged" (where relevant) and, more importantly for present purposes, charges schemes made under section 143. For a number of years, Thames Water's charges schemes dealt specifically with who was to be chargeable for unmetered supplies. Thus, the 2002 water charges scheme, which operated from 1 April 2002 to 31 March 2003, stated as follows in a paragraph headed "Payment of Charges in respect of unmetered supplies":

"Person Chargeable

a) The person responsible for payment of charges under this scheme shall be the occupier of the relevant premises to which the supply is made except where some other person is liable by agreement with Thames Water.

b) Where there are two or more people occupying the relevant premises to which the supply is made, the occupiers shall be jointly and severally liable for the payment of the charges.

c) Where the relevant premises to which the supply is made is let on a tenancy of less than twelve months or licence, the owner of the premises shall be regarded as the occupier and be liable for charges except where some other person has paid the charges or is liable by agreement with Thames Water."

A corresponding paragraph was to be found in the 2002 wastewater supply charges schemes, and the charges schemes for subsequent years up to and including 2009-2010 also included provisions in more or less these terms. Charges schemes of some other undertakers evidently still contain comparable provisions.

33. Although Flat 110 has now been Miss Jones' home for nearly 35 years, it is common ground that it is let to her under a weekly tenancy. Mr Westgate therefore submitted that subparagraph (c) of the provision set out in the previous paragraph applied and, hence, that Southwark (as "the owner of the premises") was to be regarded as regards the years 2002-2003 to 2009-2010 as the "occupier" and so liable for Thames Water's water and sewerage charges.
34. Mr Bourne countered that a charges scheme cannot impose liability on someone who would not otherwise be liable. Section 143 of the WIA, he pointed out, provides for charges schemes to deal with what charges are to be paid and when. Nothing in the section, Mr Bourne argued, enables a charges scheme to change the incidence of liability. More particularly, a charges scheme cannot deem someone to be an "occupier" when he is not. If and in so far, therefore, as any charges scheme purported to impose liability for water and sewerage charges on Southwark (which was not, Mr Bourne said, the "occupier" of tenanted properties), it was nugatory.
35. One of Mr Westgate's answers was that the word "occupiers", as used in section 144 of the WIA, is to be given a broad interpretation: the function of the word, he suggested, is to connote persons sufficiently connected with the relevant premises to justify imposing a liability or conferring a right on them. I do not, however, find this convincing. Mr Westgate himself accepted that he was contending for a "non-standard" use of "occupier". To my mind, no such construction can be appropriate in the context with which I am concerned. Far from attributing an unusual meaning to "occupier", the WIA can be seen to distinguish between ownership and occupation in a conventional way. Thus, section 144(8) provides for a particular situation in which an "owner" is to bear liability even though there is a different "occupier" and section 144C, when in force, will require an "owner" to give information to "occupiers" where premises are "occupied by one or more persons other than the owner (and not by the owner)".
36. On balance, however, I nonetheless take the view that a charges scheme can properly provide (as Thames Water's charges schemes formerly did) for the owner of premises to be chargeable where they are "let on a tenancy of less than twelve months or licence". In such a situation, the owner might be said to be a person "to whom the undertaker provides services or in relation to whom it carries out trade effluent functions" (within the meaning of section 142(1)(b) of the WIA) even if the occupier is also to be treated as receiving the services under section 144(1). Where that is so, it will, I think, be possible for a scheme to determine which of those to or in relation to whom services are being provided is to be responsible for the charges. After all, section 142(2) provides for the powers conferred by subsection (1) to be exercisable "by or in accordance with a charges scheme" and section 143(4) enables such a scheme to "make different provision for different cases" and contain "supplemental" and "consequential" provision.
37. The upshot seems to me to be as follows:

i) By virtue of Thames Water's charges schemes for 2002-2003 to 2009-2010, Southwark was liable to Thames Water for water and sewerage services provided to Flat 110 between 1 April 2002 and 31 March 2010;

ii) In respect of other periods, Miss Jones bore such liability unless there was a relevant agreement to the contrary to which Thames Water was a party (such as, on Miss Jones' case, the 2000 Agreement).

The 2000 Agreement

38. That brings me to the 2000 Agreement. The key question here is whether, as Southwark contends, it gave rise to an agency relationship under which Southwark was to collect water and sewerage charges from its tenants as Thames Water's agent or, as Miss Jones maintains, it involved Southwark buying water and sewerage services from Thames Water and re-selling them to its tenants.
39. Both sides referred to cases dealing with the construction of contracts. The relevant principles were recently summarised by the Supreme Court in Arnold v Britton [2015] UKSC 36, [2015] AC 1619. In that case, Lord Neuberger (with whom Lords Sumption and Hughes agreed) said this (in paragraph 15):

"When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to 'what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean', to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions."

40. Amongst the points that Lord Neuberger went on to emphasise were these:

i) "the reliance placed in some cases on commercial common sense and surrounding circumstances … should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision" (paragraph 17);

ii) "when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning" (paragraph 18);

iii) "while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed" (paragraph 20); and

iv) "[w]hen interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or reasonably available to both parties. Given that a contract is a bilateral, or synallagmatic, arrangement involving both parties, it cannot be right, when interpreting a contractual provision, to take into account a fact or circumstance known only to one of the parties" (paragraph 21).

41. The decision of the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] AC 1101 confirms two further points:

i) Evidence of what was said or done during the course of negotiating an agreement cannot be used "for the purpose of drawing inferences about what the contract meant", but may be admissible for other purposes, e.g. "to establish that a fact which may be relevant as background was known to the parties" (see Lord Hoffmann's speech, at paragraph 42); and

ii) Evidence that the parties "habitually used words in an unconventional sense" may be adduced to support an argument that "words in a contract should bear a similar meaning" (Lord Hoffmann's speech, at paragraph 45). This:

"is the 'private dictionary' principle, which is akin to the principle by which a linguistic usage in a trade or among a religious sect may be proved".

42. I was taken to two cases in which arrangements comparable to those between Southwark and Thames Water have come before the Courts. The earlier of the cases is Lambeth LBC v Thomas (1997) 30 HLR 89, where Lambeth Borough Council ("Lambeth") had brought possession proceedings against one of its tenants. Having referred to section 1 of the Local Authorities (Goods and Services) Act 1970 (which empowers local authorities to enter into agreements for the provision of certain services) and paragraph 20 of schedule 1 to the Water Consolidation (Consequential Provisions) Act 1991 (which states that the powers of a local authority under the 1970 Act "shall be deemed to include power to enter into an agreement for the collection and recovery by the authority, on behalf of any water undertaker or sewerage undertaker, of any charges fixed by the undertaker under Chapter I of Part V of the [WIA]"), Mance LJ (with whom Kennedy LJ agreed) said (at 94-95):

"The position is thus that the Council had at all material times the power to enter into an agreement for the collection and recovery by the Council on behalf of a water authority or company of any water charges payable or fixed for the supply of water by the water authority or company, at least in the Council's area."

43. After noting that the first instance judge had been "satisfied that the Council had entered into such an agreement", Mance J continued (at 95):

"[The judge] described the origins of the agreement as 'lost in the mists of time', but set out certain of its characteristics which are worth mention. The Council, consistently with the statutory language, claims and seeks to collect from its tenants the amounts fixed by the water company in respect of their particular properties. When it comes to accounting to the water company, the Council does so on a lump sum and discounted basis (we were told, twice yearly). The discounted lump sum is arrived at by negotiation and is based on the total water charges for all relevant Council properties, less a discount to take account of unoccupied premises and costs of collection. Presumably, although this is not stated, the discount also takes account of the risks of non-recovery, since it appears that the Council undertakes to pay the water company the discounted lump sum, irrespective of what it recovers from its tenants. We were told that the discounting means in practice, and is designed to mean, that the Council achieves for the benefit of its housing revenue account a surplus through collecting on behalf of Thames Water Utilities Limited more by way of water charges than the amount for which the Council has actually to account to that company. It is always open to an agent to contract on such a basis, and I see no objection in the present statutory context to the arrangement made between the Council and the water company. Any surplus accruing to the Council's housing account (which has been 'ring-fenced' under the relevant legislation throughout the 1990s) ensures to the benefit of all its tenants, since it enables the Council to keep rents down."

44. Plainly, the arrangement between Thames Water and Lambeth was very similar to that with which I am concerned in this case.
45. The other case is Rochdale MBC v Dixon [2011] EWCA Civ 1173, [2012] PTSR 1336. There, it was argued on behalf of a tenant of Rochdale Metropolitan Borough Council ("Rochdale") that an agreement that Rochdale had entered into with United Utilities Limited ("UU") for the former to collect water charges from its tenants was ultra vires. The Court of Appeal rejected the contention. Rix LJ (with whom Rimer and Elias LJJ agreed) took the view that the relationship between Rochdale and UU was probably one of agent and principal, but that, even if that were not so, the agreement between them provided for Rochdale to collect water charges "on behalf of" UU within the meaning of paragraph 20 of schedule 1 to the Water Consolidation (Consequential Provisions) Act 1991. Rix LJ said (at paragraph 50):

"Thus, even if perchance the ultimately correct analysis of the agreement were to be found not in agency, but, for instance, in the concept of assignment (if, indeed, the statutory claims of water undertakers on their customers can be assigned), it would seem to me that the arrangements still amounted to a collection and recovery of water charges 'on behalf of' the water undertaker."

46. Earlier in his judgment, Rix LJ had explained (at paragraph 39):

"UU had not dropped out of the picture, it remained the water undertaker which provided the water services to the occupiers of the properties concerned, it remained responsible to those tenants for the services provided, just as those tenants remained responsible, ie liable, to pay the charges statutorily imposed on them as occupiers; the charges imposed on the tenants under their tenancy agreements were the charges fixed by UU, and the liability imposed on the tenants under their tenancy agreements was the same as their liability to UU under statute. It was simply that the mechanism for the collection and recovery of those liabilities had been undertaken by Rochdale for UU. Whether it was strictly a matter of agency or not (but I believe it was), what Rochdale agreed to do by way of the collection and recovery of the water charges was done for UU, or, as one might naturally say, on behalf of UU. One might ask: Who else but UU provided the water services? Who else but UU was owed for those services? Who else but UU fixed the price of those services? If, therefore, by arrangement with Rochdale, it was Rochdale who invoiced and collected those water charges, it could properly be said that Rochdale did so on behalf of UU."

47. Rix LJ referred to relevant features of the agreement between Rochdale and UU in paragraph 41 of his judgment, where he said:

"Whether the charges were demanded by UU, they were certainly fixed by UU, and I believe it can properly be said, if that were necessary, that they were demanded as well, albeit that was done through the collection method provided by the agreement. All this is reflected in the wording of the agreement cited above: which refers to 'charges fixed by the company' (preamble C); to 'charges for water and sewerage services provided by the company' etc (definition of 'charges' in clause 1); to 'charges due in respect of their occupation of the properties' (definition of 'Collection method' above); to customers and tenants (being the same) 'who are liable to pay water or sewerage charges to the company pursuant to sections 142 and 144 of the Act' (definition of 'Customers' above); to UU 'authoris[ing]' (the language of agency) Rochdale to collect the charges 'on behalf of the company' (clause 2.2); to Rochdale being under an obligation to carry out such collection with 'reasonable care and skill', which shows that in doing so Rochdale is acting for UU and not merely for itself (clause 3.2); to Rochdale being under a duty to UU to invoice the customers (of course, those are UU's customers even if they are also Rochdale's tenants) for the charges fixed by UU (clauses 3.3 and 4.1); and to Rochdale being under a duty to deal with billing complaints itself (but in a 'prompt, courteous and efficient manner', because in doing so Rochdale is of course dealing with complaints about UU's charges) and to refer to UU any complaints 'regarding the provision of water and sewerage services by the company' (because of course those services are being provided by UU to its customers and Rochdale's tenants) (clause 3.2). Moreover, although there is a general provision in clause 15.2 stating that nothing in the agreement constitutes UU and Rochdale as partners or principal and agent etc, there is an immediate express proviso:

'Save in respect of the collection of charges by the council, the council does not have (nor may it represent that it has) any authority to act or make any commitments on the company's behalf'.

That means that in that respect, concerning the collection of charges, Rochdale does have that authority, and to that extent therefore it is acting as an agent on behalf of its principal and may represent itself as such. Just as clause 2.2 had earlier stated in the definitive 'Agreement' clause: 'The company hereby authorises the council to collect the charges on behalf of the company by the collection method'."

48. Rix LJ went on (in paragraph 42):

"In such circumstances it seems to me to matter not a bit that, by agreement between UU and Rochdale, Rochdale pays UU in bulk and at different times from its weekly collections. To some extent it collects in advance, and to some extent it collects in arrears, of its quarterly payments to UU. Neither is significant; it is the deal between the parties. Rochdale is certainly entitled to a price for its administrative services, which is expressed as a commission, a typical word used in an agency context. Of course, the mere use of labels, or of assertive language tracking the statute (paragraph 20 of Schedule 1 to the WC(CP)A 1991), will not be decisive: but I see nothing in the provisions of the agreement to suggest a manipulative use of such labels or of language in general. It seems to me that the agreement expresses the reality of the enterprise. Nor does it matter that there is no provision for a liability to account as a fiduciary. There is a liability to account, but it is kept suitably simple, and is governed by the terms of the agreement. If, however, something went wrong and Rochdale ceased to provide the payments required, I do not doubt that it might be required to account; of course, it could also simply be sued for the contractual payments in debt."

49. Of Lambeth LBC v Thomas, Rix LJ said this (in paragraph 48):

"Because Mrs Thomas was a litigant in person, it is not entirely clear what issues were taken regarding the scheme, and therefore not entirely clear whether anything like the current ultra vires issue was before that court. In these circumstances I would be prepared to regard the Lambeth case as not amounting to an authority binding on this court on the present issue: however, this court through Mance J's judgment clearly gave close and detailed consideration as to whether a scheme such as that described by him would fall within the statutory language in circumstances where it appears that Mrs Thomas, who after all was resisting possession on Lambeth's appeal, was as it seems objecting to the principle of the thing. I would therefore regard the Lambeth case, if not formally binding on us, to be a most helpful authority to Rochdale. Mance J and Kennedy LJ clearly regarded the scheme described, essentially the same as the agreement in this case, as falling within the statutory language, as an agreement for the collection by the council on behalf of the water company of water charges fixed by the water company, and as a contract amounting to agency. I would therefore regard the Lambeth case as supporting the conclusion to which I have independently arrived in this case."

50. Thus, Rix LJ thought that the relationship between Rochdale and UU was probably one of agency. However, the agreement at issue before him pointed much more clearly in that direction than the one with which I am concerned. The features that Rix LJ listed in paragraph 41 of his judgment (quoted in paragraph 47 above) are almost entirely lacking from the 2000 Agreement. The 2000 Agreement contains no reference, for example, to tenants being liable to pay water or sewerage charges to Thames Water, to Thames Water authorising Southwark to collect such charges on its behalf, to Southwark owing any duty of skill and care or to Southwark having any obligation to invoice tenants or in respect of complaints from them. There is, moreover, nothing akin to the proviso that Rix LJ set out.
51. Unsurprisingly, Mr Bourne attached more importance to the Lambeth case. There, he said, a local authority was considered to have entered into an agreement for the collection of charges on behalf of an undertaker in circumstances very comparable to those in the present case. Here, Mr Bourne pointed out, the 2000 Agreement provided for Southwark to receive "commission" ("a typical word used in an agency context", as Rix LJ observed in the Rochdale case) and for Thames Water to pay VAT on the "commission". The fact that VAT was payable implied, Mr Bourne argued, that Southwark was considered to be providing Thames Water with a service and that the "commission" did not merely represent a discount on the price of water and sewerage services (compare e.g. De Voil Indirect Tax Service, at paragraph V3.158). Mr Bourne accepted that the 2000 Agreement did not contain obligations normally found in agency contracts, but attributed this to a practice of writing down only what was of practical importance to the parties at the time. Mr Bourne further sought support for his case in the context in which the 2000 Agreement was entered into. Among other things, he said that the existence of section 150 of the WIA (as to which, see paragraph 21 above) made agency more attractive to the parties than a purchase and re-sale arrangement; that it can be inferred from evidence given by Mr Young and Miss Jill Jones that Southwark has been describing itself as collecting water and sewerage charges on behalf of Thames Water since well before 2000; and that such pre-2000 documentary material as is available all points to Southwark acting as an agent. On this last point, the documents to which Mr Bourne took me included a letter from Thames Water Authority to the London Borough of Tower Hamlets dating from 1977 (when direct billing was in prospect) in which there was reference to the possibility of entering into an "appropriate agency agreement" with provision for a "collection commission" and "void allowances" and a suggestion that there should be a "unified all London approach"; a tenant's handbook from 1997 in which Southwark described itself as collecting charges "for the water company"; and the 1999 report quoted in paragraph 7 above in which Southwark's director of housing spoke of "the agency agreement" and of "agency commission payable to Southwark for the collection of water charges".
52. In the end, however, I have concluded that the relationship between Southwark and Thames Water was not one of agency. My reasons include these:

i) Clause 2.1 of the 2000 Agreement provided for Southwark to pay for "all of the Provider's charges … in respect of the Services provided to the Unmeasured Premises", reflecting a recital to the effect that Southwark would "pay for the Services in respect of the Premises". It is common ground that Southwark was thereby obliged to pay "the Provider's charges" regardless of what (if any) sums it received from its tenants. The alleged principal (Thames Water) was to have no interest in moneys collected by its alleged agent (Southwark);

ii) While calculated by reference to tariffs contained in charges schemes (see clauses 2.3 and 2.3 of the 2000 Agreement), the sums that Southwark had to pay to Thames Water did not correspond to the total of the sums that tenants were required to pay. What was due from Southwark was a net sum, after "allowances and reductions" had been deducted;

iii) A linked point is that the 2000 Agreement made no provision for Southwark to account to Thames Water. That is unsurprising since the idea was evidently that Southwark should have an unconditional obligation to pay "the Provider's charges" and no liability to make any further payment. The absence of an accounting obligation is, however, significant. "[T]he duty to account is a typical feature of the agent's position" (Bowstead & Reynolds on Agency, 20^th ed., at paragraph 1-032, citing Michelin Tyre Co Ltd v Macfarlane (Glasgow) Ltd [1917] 2 SLT 205);

iv) In other respects, too, the usual incidents of agency were missing from the 2000 Agreement. There was, for example, no provision for Thames Water to exercise any control over Southwark (compare Bowstead & Reynolds, at paragraph 1-017) or for Southwark to exercise diligence, care or skill (compare Bowstead & Reynolds, at paragraphs 1-016 and 6-017);

v) The 2000 Agreement also omitted any reference to Thames Water giving Southwark authority to collect money from the tenants. Yet it is of the essence of agency that the agent should be able to affect the principal's legal relations with third parties (see Bowstead & Reynolds, at paragraphs 1-001, 1-003 and 1-004);

vi) If I am right in thinking that Thames Water's charges schemes imposed liability for water and service charges on Southwark between 1 April 2002 and 31 March 2010 (as to which, see paragraphs 30-37 above), there can have been no possibility of Thames Water authorising Southwark to collect such charges from its tenants on Thames Water's behalf during this period. The tenants would not have owed any money to Thames Water;

vii) The 2000 Agreement referred to Southwark as "the Customer". Although I doubt whether the parties should be taken to have had in mind the definition of "customer" to be found in section 219 of the WIA, the fact remains that an agent would not generally be termed a "customer";

viii) Mr Bourne noted that an unconventional meaning can be attributed to a word in a contract if the parties habitually used the word in that sense. While, however, there is evidence that the parties sometimes used the word "customer" loosely, Southwark has not come close to demonstrating that "customer" was habitually used in a particular way that could explain a true agent being so described in a formal document;

ix) The 2000 Agreement's use of "Customer" is counterbalanced by its use of "commission". However, "the mere use of labels … will not be decisive" (see paragraph 42 of Rix LJ's judgment in Rochdale) and, unlike normal commission, this "commission" did not depend on any performance or the happening of any event. In practice, it simply served to reduce what Southwark had to pay Thames Water;

x) That leads to the next point: that the mere fact that the parties may have referred to their relationship as one of "agency" and to Southwark collecting water and sewerage charges "on behalf of" Thames Water is of no real importance. "[T]here is no magic in the word 'agency'. It is often used in commercial matters where the real relationship is that of vendor and purchaser" (Ex p White, re Neville (1871) LR 6 Ch App 397, at 399; see too Bowstead & Reynolds, at paragraph 1-032);

xi) In the Lambeth case, the focus appears to have been on whether Lambeth was acting "on behalf of" the water company for the purposes of paragraph 20 of schedule 1 to the Water Consolidation (Consequential Provisions) Act 1991 rather than on whether a relationship of agency in the strict sense existed. In any case, "it is not entirely clear what issues were taken" (see paragraph 48 of Rix LJ's judgment in Rochdale);

xii) How the parties have conducted themselves since entering into the 2000 Agreement can be of little or no significance (see e.g. Lewison, "The Interpretation of Contracts", 6^th ed., at 179-189), but, in case it matters, it can be observed that the parties' behaviour has not obviously been entirely consistent with an agency relationship. By way of example, Southwark's charges to its tenants have not accorded with Thames Water's tariffs in every respect (e.g. as regards charging for garages); Southwark has considered itself to be entitled to make decisions without consulting Thames Water as to what, if any, steps it should take to recover charges from tenants; and Thames Water has sent bills to Southwark referring to its "Commitment to our customers" and "several Codes of Practice including a guaranteed standards scheme" and none to the tenants; and

xiii) Although the 2006 order may make a sale and re-sale arrangement disadvantageous to Southwark, no Water Resale Order had yet been made at the date of the 2000 Agreement.

53. In short, it seems to me that, until the 2013 Deed was executed at least, the relationship between Thames Water and Southwark was not one of true agency but rather involved Southwark buying water and sewerage services from Thames Water and re-selling them to its tenants. It must follow, I think, that the 2006 Order was applicable.

Maximum charges

54. By virtue of paragraph 6(2)(b) of the 2006 Order (which is quoted in paragraph 25 above), the "maximum charge" payable where the water supply of a "Purchaser" within the meaning of the Order is unmetered is to be calculated by deducting any amounts recoverable from "Purchasers" with meters and "any other person supplied" from the "amount payable by the Re-seller to the Relevant Undertaker" (paragraph 6(2)(b)(i)) and then apportioning the "amount still to be recovered after performing the deduction" among the relevant "Purchasers" (paragraph 6(2)(b)(ii)).
55. Mr Westgate argued that, in the present case, the 18% "commission" and 5% "voids allowance" fall to be taken into account when determining the "amount payable by the Re-seller [i.e. Southwark] to the Relevant Undertaker [i.e. Thames Water]". In contrast, Mr Bourne submitted that the "commission" and "voids allowance" should be disregarded in this context. They did not, he contended, serve to reduce the amount payable to Thames Water for the water and sewerage services, but were to be seen as due to Southwark under separate transactions or, at least, separate parts of the same transaction.
56. In my view, however, Mr Westgate's argument is to be preferred. As he said, paragraph 6(2)(b)(i) of the 2006 Order focuses on the "amount payable by the Re-seller to the Relevant Undertaker". Under the 2000 Agreement, Southwark had to pay Thames Water only the net sum obtained by "applying the relevant tariffs … for the Services, less the allowances and reductions to which the Customer is entitled" (viz. the "commission" and "voids allowance") (see clause 2.2). The tariffs were "reduced by 5%" (see clause 3.1) and "the balance of the Charges" was "reduced by a further 18%" (see clause 3.2). However the parties may have viewed the "commission", the reality is that it simply served to reduce the amount that Southwark had to pay. It would be still more anomalous if the "voids allowance" were disregarded since that would mean that "voids" would be ignored when determining the "amount payable" yet still taken into account when considering how many properties the "amount payable" was to be shared between.
57. In the circumstances, it seems to me that, unless and until the 2000 Agreement was varied by the 2013 Deed, Southwark was charging Miss Jones (and other tenants with unmetered water supplies) more than was permissible under the 2006 Order.

Conclusions

58. I can summarise my conclusions as follows:

i) Unless and until the 2013 Deed took effect, the relationship between Thames Water and Southwark was not one of principal and agent but involved Southwark buying water and sewerage services from Thames Water and re-selling them to its tenants;

ii) As a result, the 2006 Order applied and served to limit what tenants could be charged; and

iii) The amounts that Southwark charged Miss Jones exceeded the "maximum charge" allowed under the 2006 Order.

59. I should like to add, finally, that the case was very well argued on both sides.