Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 100
CA107/10	OPINION OF LORD MENZIES in the cause LANDMORE LIMITED Pursuers; against SHANKS DUMFRIES AND GALLOWAY LIMITED Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: MacColl; Tods Murray LLP

Defenders: Borland; Semple Fraser LLP

16 June 2011

Introduction

[1] The pursuers are the heritable proprietors of Galdenoch Landfill and Civil Amenity Site ("the premises"), near Stranraer. By lease dated 26 July and 25 November 2004 ("the lease") the pursuers let the premises to the defenders from 27 November 2004 until 26 November 2030. The premises were to be used as a landfill refuse site and civil amenity waste disposal site.

[2] Clause 2 of the lease provides that the defenders will pay an occupational rent (subject to review) together with a "Royalty Rent" to be calculated on the basis of the material being brought onto the premises by the defenders. Clause 2(3) provides that the tenant shall ....

"pay to the Landlord an additional royalty rent ("the Royalty Rent") comprising the following:-

(i)                 in respect of the first 40 metric tonnes of inert waste entering the Premises on any given day the sum of THIRTY PENCE (£0.30) sterling per metric tonne of inert waste entering the premises;

(ii)               in respect of (a) each additional metric tonne of inert waste entering the Premises on any given day over and above the first 40 metric tonnes entering the Premises on the same day, and (b) each metric tonne of putrescible waste entering the Premises, the sum of ONE POUNDS (£1) sterling per metric tonne of inert waste or putrescible waste, as the case may be ("the Base Figure"), (in each case exclusive of value added tax);

subject to a minimum annual payment in respect of the Royalty Rent of FIFTEEN THOUSAND POUNDS (£15,000) sterling (exclusive of value added tax) ("the Minimum Royalty Rent"), which Royalty Rent shall be payable quarterly in arrears without any deduction or set off whatsoever on 28 February, 28 May, 28 August and 28 November throughout the duration of this Ground Lease, the first payment being due on the Scottish Quarter Day following the Date of Entry and so forth quarterly in arrears ....".

In addition, Clause 8.8 of the Lease provides inter alia as follows:

"The Tenant will supply to the Landlord upon written request (but not more than quarterly) certified documentation in respect of the tonnage of putrescible and inert waste entering the Premises ....".

[2] In order to operate the premises as a landfill site, the defenders bring material onto the premises which they use to form cells, which are then filled and thereafter capped and the area landscaped with other materials brought onto the premises by the defenders. The pursuers aver that the material brought onto the premises by the defenders for these purposes is material which is discarded and disposed of by the defenders within the premises, and is accordingly inert waste for the purposes of Clause 2(3) of the lease and falls to be taken into account in the calculation of Royalty Rent. They refer to the Waste Framework Directive (75/442/EEC) (as amended), and to SEPA guidance "Is It Waste". They aver that the definition of the Royalty Rent in Clause 2 of the lease included a discrete element for inert waste in order to provide for payment to the pursuers of a sum in respect of these materials. The materials having been discarded by a third party fall to be regarded as waste. The defenders deny that the materials used in the construction of the cell, its capping or its landscaping is, in any ordinary and natural sense of the word, "waste". The materials are not refuse matter, nor are they unserviceable materials or useless by-products. They are not damaged articles nor are they discarded.

[3] In the present action the pursuers seek several remedies. In their first conclusion they seek declarator (reading short) that all inert material brought by the defenders onto the premises during the currency of the lease for the purposes of (a) waste cell modelling, (b) waste cell capping, and (c) land restoration purposes is "inert waste" for the purposes of Clause 2(3) of the lease. For present purposes, I need not rehearse the other remedies sought by the pursuers, as they were not the subject of live discussion before me. Parties were agreed that a proof before answer should be held limited to the pursuers' first conclusion, and to parties' averments directed in support of and against that conclusion. I heard evidence and submissions in relation to this aspect of the dispute. In the course of closing submissions, both counsel agreed that the following question should be answered by the court:

"Does the soil (and any other inert material) forming the waste regulating layer and restoration materials layer of Areas 1, 2 and 3 and Cell 1 of the Galdenoch Landfill Site (as identified in paragraphs 5(ii) and (v) and (vii) of the parties' joint minute) fall to be classified as 'inert waste' for the purposes of Clause 2(3) of the parties' Lease (6/1 of process)?"

It is to this matter that this Opinion is confined.

The evidence
[4] Parties lodged a joint minute (No.34 of process) recording certain agreements relating to productions, the witness statements of two witnesses and certain other matters. I do not rehearse here the full terms of the joint minute, but the following paragraphs are necessary for an understanding of the evidence:

"The partial capping and restoration of Areas 1, 2 and 3

5. The steps, and materials, involved in the partial capping and restoration of areas 1, 2 and 3 were as follows.

(i)                 First, the waste deposited in these areas was reshaped into an appropriate formation.

(ii)               Secondly, a so-called 'waste regulating layer' was placed on top of the waste. This layer comprised soil.

(iii)              Thirdly, a low linear density polyethylene ('LLDPE') membrane was placed over the waste regulating layer. This membrane is a manufactured product made of plastic.

(iv)             Fourthly, a 'protection layer' was then placed on top of the LLDPE membrane. This protection layer is a manufactured product made of polypropylene or polyester fibres. This is a non-woven geotextile, similar to a felt carpet-tile (typically 3-10mm thick).

(v)               Fifthly, there was then placed on top of the protection layer some 1 metre of 'restoration materials'. This 1 metre layer was made up of two sub-layers, one of a depth of approximately 300mm and the other of a depth of approximately 700mm. The initial sub-layer of approximately 300mm was placed immediately on top of the protection layer. This initial sub-layer comprised soil. The second sub-layer of approximately 700mm was made up of a mixture of soil and peat.

The capping and restoration of Cell 1

7. The steps, and materials, involved in the capping and restoration of cell 1 were the same as those described in paragraph 5(i)-(v) above, with the exception that in relation to step (v) only soil was used for the 'restoration materials' (ie, no peat was used).

Miscellaneous

9.                 The soil used in the capping and restoration process referred to at paras. 5 and 7 above was sourced from a construction site, or sites, operated by a third party.

10. The soil referred to in the preceding paragraph did not require to be paid for by the defender."

[5] I heard evidence from six witnesses, each of whom had provided a witness statement (or report). In addition I had witness statements from Mr Alan Davidson and Mr Colin Dempster (Nos. 21 and 33 of process), and it was agreed in the joint minute that the contents of their statements should be treated as their evidence subject to the defenders reserving their position as to the relevancy and admissibility of that evidence. Because these witness statements are in process, I shall give only a brief summary of the salient points of each witness' evidence. It should be noted that before any evidence was led, counsel for the defenders reiterated an objection which had been made at an earlier hearing to the admissibility of certain parts of the evidence of Mr Thomson and Mr Walker; I shall return to this objection at a later stage in this Opinion.

[6] Robert Elvin Thomson was born in 1938 and lived at an address in County Tyrone, Northern Ireland. He was a director of the pursuers and negotiated the lease on their behalf. He adopted his statement (No.22 of process). He had experience of the commercial letting of land, being a farmer and a director of a company involved in sand and gravel extraction and concrete production in Northern Ireland. In 1998 the company sought planning permission to use a disused gravel pit for a landfill refuse site; this application was unsuccessful, but because of his involvement in preparing it Mr Thomson gained a detailed understanding of the EU and Domestic Regulatory Framework for landfill operations, and he knew "a fair bit" about the waste landfill industry. Under reference to No.6/9 of process he confirmed that when the parties were discussing a possible lease of the premises they were thinking of the statutory background that would apply at the time.

[7] On the basis of his commercial experience it was his view, as a businessman involved in the commercial letting of commercial landfill sites, that the use of the word "waste" in the context of a lease of a commercial landfill site would be informed and construed against the general background of law (and in particular EC Regulations) relating to waste. He understood (both at the proof and at the date of the lease) that waste related to materials that were discarded by third parties and would include materials generated as bi-products of construction work (such as the soil that required to be excavated and disposed of when houses or other buildings are built).

[8] Mr Thomson believed that much of the material used for the partial capping and restoration of Areas 1, 2 and 3 and Cell 1 was properly regarded as inert waste, and that the defenders were obliged to pay a Royalty Rent in respect of this. The defenders had refused to provide the pursuers with certified docquets as to the quantities of such materials which had been brought onto the premises.

[9] In cross-examination Mr Thomson confirmed that he accompanied Mr Parsons when the latter inspected the site and an inspection pit was dug. Mr Parsons had inspected the whole of Areas 1, 2 and 3 - both the area designated "permanent cap" on No.7/34 of process and the area designated "temporary cap". The inspection pit was dug in the vicinity of the words "Area 1, 2 and 3 permanent cap" on No.7/34 - Mr Thomson pointed to an area just above and to the right of the numeral "3". He agreed with Mr Parsons' opinion that "the information as a whole does suggest that the capping materials could be considered as 'waste'". Although only one inspection pit was dug, other smaller "spade deep holes" were dug around the site, although none of these was deeper than the depth of one or two spadefuls. Nonetheless Mr Thomson considered that this was likely to be a good sample. He accepted that subsoil brought from off-site was not material left over from a manufacturing process - it was a natural product, and not a useless by-product of some industrial process. However, it had been damaged by being taken out of its natural position: it was taken from there because it was not needed there. As far as he could see from his investigations, there was no selection of the material when it was loaded onto trucks at the off-site locations. It was put to him that the soils were not discarded by R & D Construction Limited ("R & D"), who were the developers of the residential development site at Ailsa Gait from which the materials, or the majority of them, were obtained; he replied that they were cast aside to make space to build houses, so he considered that they were discarded. The material was useless to R & D, and nothing was done to it between leaving R & D's development site and arriving on the premises. The material was waste as far as R & D was concerned, and it remained waste when it entered the premises. He accepted that the material was put to use after it had entered the premises, but in his opinion the material was waste, both in terms of the regulations and in ordinary parlance.

[10] Gary Thomas Walker was aged 41 and a principal policy officer with SEPA. He adopted his witness statement; the concern that he expressed in paragraph 5 of that statement was that the letter from SEPA dated 27 July 2010 (No.6/4 of process) did not make it clear that topsoil from a green field site is not inert waste, but subsoil from a green field site would be inert waste. In cross-examination he confirmed that he was considering the definition of waste in the context of SEPA's concern for regulatory purposes. He assisted in drafting the document "Is It Waste" (No.6/3 of process); it was not SEPA's intention when publishing this guidance to give a definition of how waste should be construed in a lease. He had never seen the lease in the present case.

[11] Andrew James Parsons was aged 42 and was a director of IKM Consulting Limited, which was one of the largest independent environmental and engineering consultancies in Scotland. He obtained a degree in geology in 1991 and then worked as a geologist with the oil industry. He then obtained a Masters degree in mineralogy, and since then had been an environmental consultant specialising in waste and landfill sites. He spoke to his report dated 23 December 2010 (No.6/22 of process).

[12] Mr Parsons confirmed that only one inspection pit was dug to enable him to provide his report, which was located in the vicinity of the words "Area 1, 2 and 3 permanent cap" on production 7/34. He noted from his visit to the premises that there were some concrete kerb stones, bricks and other materials that he would associate as having come from building developments, as shown in photographs 3 and 4 attached to his report. The material found in the inspection pit he described as reworked glacial till, which was a clay material commonly found throughout south-west Scotland, which had been moved (perhaps by bulldozer) and had been dug over. He took samples of the material at the premises and also at the Ailsa Gait site, which are Nos. 6/24 and 6/25 of process.

[13] In the first full paragraph on page 5 of his report Mr Parsons observed that

"Where materials are transported from another site (e.g. surplus soils from a construction site) they would normally be considered as a 'waste' as there is usually 'an intent to discard'. In order to move such soils, a waste management licence exemption should be applied or the activity controlled via the conditions of the PPC Licence for the facility. SEPA have confirmed that the movement of soils from a construction site to the landfill, irrespective of their intended use, would constitute a 'waste disposal activity'".

He was asked whether these observations related only to the context of the statutory control regime, or whether they applied more broadly to the commercial context; he replied that his views were based on the statutory control regime, but in his experience they could be extended to commercial contracts, which are often based on the statutory regime. He had experience of several hundred development sites where material has been excavated and the developer wants to get rid of it; a waste management licence or SEPA exemption would be required to allow this to be used for another use.

[14] Mr Parsons expressed the opinion that surplus subsoil from a building site would be waste. If subsoil had been excavated from a quarry or stock-piled for a specific purpose, if it had been graded and processed to meet a specification and if it had been licensed, it might be regarded as an engineered product within a reasonably short timescale (although if it was not used within that timescale it would thereafter be regarded as waste). In order to be converted from waste to an engineered product, the material would have to be put through a licensed treatment in order to take it out of the waste chain. He might possibly have answered differently in 2004 depending on changes in the regulations - it was his understanding that there were changes around 2004, but these provisions might be the same. He would expect the defenders, who are heavily involved in the waste management industry, to be aware of the regulatory and statutory background of sites such as this.

[15] In cross-examination Mr Parsons expressed the view that although there was only one inspection pit, the appearance of the materials on the ground was very similar over the whole of Areas 1, 2 and 3 which suggested a similar composition across the whole area. The materials did not appear to meet the specification both vertically and laterally - some areas had bare clay on the surface, whereas other areas were covered with vegetation. With regard to the observation at the first hollow bullet point at the top of page 4 of his report that no peat layer was observed and the clay did not appear to have been mixed with peat, he accepted that he did not know if the work in this area had been completed or not. With regard to the second hollow bullet point, he accepted that he did not know if it was the defenders' intention to lay any further soil, although the patchy covering of organic material suggested that the operation was complete but not well done. He had seen extracts of the correspondence between SLR and SEPA regarding the use of compost. However, he observed that it would be unlikely that the contractors had prepared a large area of capping material disconform to specification with the intention of digging it up again and relaying it, as this would result in unnecessary and excessive cost. With regard to the third hollow bullet point, Mr Parsons had measured the depth of the inspection pit with a tape measure, and the large cobbles were at the depth specified for the 300mm basal layer. These were big stones - the whole of the stone could not been seen in the base of the pit. The pit was big enough for him to get into it.

[16] Mr Parsons accepted that he had not asked the defenders whether their works were finished in this location, but on the basis of the thickness of the capping layer he would question why it would be re-worked or was not finished. It appeared that the material had been in this area for quite some time. Although only one inspection pit was dug, he carried out a walkover of the whole area and some surface scrapes. He accepted that in an ideal world more excavations would be useful, but in the real world this is not always possible. Although he had walked over Cell 1, no inspection pit was dug in this area.

[17] Mr Parsons accepted that the definition of waste was a difficult subject which did not admit of a clear answer in some instances. It would depend on a number of factors, one of which may be whether the soil had been treated or not. Other factors might include whether the material had been graded, the intention of the party originally holding the material, and the use to which the material was put. He would have expected that there would have been some attempt to find soil which would meet the specification for the capping layer for the premises. It was not for him to comment on whether the soils for the waste regulating layer and the restoration layer were useless, but he agreed that the material imported onto the site had been put to use, namely the formation of a waste regulating layer and a restoration layer. It was put to him that, in any natural sense of the word, those materials were not waste, but he disagreed - they could be waste if they had been excavated in the course of building development operations, loaded onto trucks and taken to a landfill site.

[18] In re-examination Mr Parsons agreed that that part of the premises marked "Area 1, 2 and 3 temporary cap" on No.7/34 of process looked different from the permanent capped area; it had an exposed membrane with objects weighing it down, whereas the permanent capped area had some vegetation on it. He confirmed that there was sufficient information available to him to enable him to draw the conclusions which he had drawn.

[19] Dr Darren Keogh was aged 40 and a principal with SLR Consulting. He was a chartered civil engineer, and had technical responsibility for all landfill work of SLR Consulting throughout the UK. His qualifications and experience are to be found in his curriculum vitae (No.7/33 of process). His special subject for his MPhil was landfill engineering. He had been with SLR (which is the largest consultancy in the waste sector) since March 2005, since which date he had been involved in between sixty and seventy landfill projects. He was the project manager for the premises. His involvement included the design and production of the specification document for the capping of the premises. He spoke to his witness statement (No.26 of process).

[20] Dr Keogh was familiar with the specification of earthwork requirements in relation to the premises (No.7/23 of process), and in particular the specification for materials for the waste regulating layer contained at paragraph 3.5 thereof. This was designed to ensure that the material used was geotechnically stable, and to avoid the use of sharp rocks or debris which might puncture the membrane. The material used to create the waste regulating layer in Areas 1, 2 and 3 complied with this specification. Once brought onto the premises it would be subject to visual inspection, and after being spread on Areas 1, 2 and 3 it would be subject to a stone picking exercise to ensure that it complied with the specification. Similarly with regard to the material used for the restoration layer, he confirmed that the material brought onto the premises complied with the required specification in Part 6 of 7/23. Peat was available on the premises, so this did not need to be imported. Again, the material would be subject to a visual inspection by the CQA engineer after it had been brought onto the premises, at which time it could either be accepted or rejected. If it was accepted, it would be spread over the area to be capped, and would again be the subject of a stone picking exercise. Even if the material was accepted as suitable after being brought onto the premises, it might become unsuitable thereafter if it became too wet or too dry, and it might require to be processed further.

[21] The specification laid down in 7/23 was subsequently amended; SLR wrote to SEPA by letter dated 11 September 2009 (No.7/26 of process) and SEPA agreed to a phased restoration of Areas 1, 2 and 3 as shown on No.7/28 of process. This was to allow for the shortage of suitable restoration materials within a reasonable distance of the premises. The area hatched in dark blue was capped to the full depth of 1 metre with restoration material; the area hatched red was incomplete and extended only to 0.75 metre, and the area hatched green was less complete still and extended only to a depth of 0.5 metre. SEPA had still not given its consent to the proposal for the use of compost within the restoration material, contained in paragraph 6.1.1 of No.7/26. However, to the extent that the various hatched areas on 7/28 had been completed, they had been completed with material which complied with the specification. The material was regularly inspected and assessed as suitable, and monitored to ensure that it did not deteriorate. It had not been sifted or sieved or graded mechanically, because this was difficult to carry out for clay materials and moreover a visual assessment indicated a limited amount of oversized material. Dr Keogh also confirmed that the material used for both the waste regulation layer and the restoration layer in Cell 1 complied with the relevant specification in 7/24. All the capping works in Cell 1 were complete to the full depth of 1 metre, so if SEPA allowed the use of compost material in the restoration layer it was more likely that this would be used in the uncompleted parts of Areas 1, 2 and 3.

[22] With regard to Mr Parsons' evidence that in order to take material out of the "waste chain" it would require to be processed, Dr Keogh observed that if the material already met the specification, there was no point in processing it; in any event, there was an element of processing, because when extracting from the original development site Dr Keogh would expect the contractor to put aside oversized stones, and once the material was spread on the premises there was a stone picking operation to remove any oversized stones. Moreover, sometimes the material was too wet, and it was put aside to allow it to dry; sometimes it was too dry, and it was put aside to allow it to become moist. In his professional opinion he did not consider the material used for the waste regulation layer or the restoration layer to be waste. If there was a material deemed to be fit for purpose, coming from a green field site and meeting the specification, why should it be classified as waste? It was a natural resource.

[23] Dr Keogh explained that the difference between a permanent cap and a temporary cap was that the former would be put in place once the waste had reached the height specified under planning consent and the PPC Licence, and once this was in place it would never come off, whereas a temporary cap was not regulated by SEPA and was merely a temporary measure when the waste had not reached the agreed height. There were several reasons for sowing grass seed on both temporary and permanent caps, notably visual amenity, stabilisation of a slope and prevention of washout of fine particles. SEPA may insist on grass seeding.

[24] Mr Parsons' observation that he could not understand why the operators would wish to spend time and money revisiting the restoration layer in Areas 1, 2 and 3 was made without knowledge of the phased restoration of this area. Dr Keogh accepted that once the full 1 metre depth of restoration layer had been achieved in a part of an area, this would not be revisited, but there were still significant parts of Areas 1, 2 and 3 which had not achieved the full height. The restoration layer was being applied in progressive phases because of the scarcity of suitable materials. This was not uncommon in the waste landfill industry - Dr Keogh estimated that between 30% and 40% of the sites with which SLR was concerned were being restored in this way. With regard to Mr Parsons' findings from the trial pit which he dug, Dr Keogh was sure that the specified quantity of peat was contained in the restoration layer which had been completed and was hatched in blue on 7/28, but in the other areas the defenders were still waiting for SEPA to sanction the use of compost, so peat has not yet been introduced. He suspected that the inspection pit had been dug on a roadway within the dark blue area, which would not be representative of the rest of the area. There were many such roadways, spaced only 10 to 15 metres apart. The inspection pit might also have been dug at about the boundary between the blue shaded and red shaded areas on the plan. He did not consider that it was possible to draw safe conclusions on the basis of a single inspection pit, which was not representative of the total area of Areas 1, 2 and 3 permanent cap, which amounted to between 60,000 and 70,000 square metres. He considered that such a large area would need between 20 and 25 trial pits to be dug on a pre-planned grid in order to achieve reliable results. A methodology relying on the digging of one trial pit and then walking over the surface of the area was not adequate, and the results were definitely not representative.

[25] In cross-examination Dr Keogh confirmed that he was the author of Nos. 7/27 and 7/35 of process, the latter superseding the former. Under reference to paragraphs 47 and 52 of his witness statement (No.26 of process) he could not be sure that any of the material was sourced from Dick's Hill. He was not aware of the contractual arrangements for the obtaining of any of the materials - it was quite possible that they came onto site without having been paid for. He knew that some of the material was stock-piled on the site for the waste regulating layer, but he did not know if any had been stock-piled for the restoration layer. He did not know who found the materials nor who brought them on site. If there were large stones (75mm plus) within the 300mm lining layer, this would not necessarily mean that the specification had not been complied with, because one cannot guarantee that oversized particles would always be excluded. Moreover, they were concerned in this context not only with the size but the angularity of the stones, which was not something covered by the specification. The specification was there for guidance as much as anything else.

[26] With regard to what was or was not waste, Dr Keogh observed that SEPA and HMRC had different views on this. He was of the opinion that if material does not fall into a prohibited category, and it is useable, it is not waste. However, this was to look at the issue not from the perspective of the person from whom the material was being obtained. EU waste directives were not his area of professional expertise, and he was not competent to answer questions on this field. He was however aware that the intention to discard was a consideration for some (including SEPA) as to whether or not material was waste. He accepted that the materials in question came from excavations arising from building work by R & D, but he could not comment on whether they wanted to get rid of these materials.

[27] Donald Mackenzie Chalmers was a director of Chalmers Construction Limited, Dumfries. He spoke to his witness statement No.31 of process and adopted it as his evidence. He was asked by R & D to tender for the excavation, removal and disposal of any surplus material from a housing site which they were developing at Ailsa Gait. Before tendering for this work Mr Chalmers contacted the defenders to see if they had a requirement for the soils, and if not, how much they would charge for the material to be received on the landfill site. He gave the defenders soil investigation reports, and the defenders confirmed that they would take the material and waive any gate fee or landfill tax so long as the material complied with the terms of the reports. If it was not in accordance with the reports it would have to be tipped and the defenders would levy a charge for this material as waste. In fact all of the material which was supplied from Ailsa Gait complied with the report and Mr Chalmers was not charged for any of it by the defenders. None of the material was stock-piled at Ailsa Gait; it was excavated, loaded straight onto lorries and taken to the premises. Mr Chalmers' personal view was that the material was not waste, because it was considered to be fit for purpose by the defenders. When it was taken onto the premises it was tipped in one big heap, so that it remained fit for purpose.

[28] Craig Steel worked for the defenders between 2005 and 2009, latterly as landfill manager for the Galdenoch site. He spoke to his witness statement, No.29 of process, which he adopted as his evidence. In about March 2008 he had discussions with R & D about the defenders accepting further material from the Ailsa Gait site. He was provided with a land survey report to show that the material was not contaminated and that it was suitable for purpose. The defenders did not collect the material; instead, R & D arranged for it to be delivered to the premises. Some of the material was used immediately in the restoration of Areas 1, 2 and 3, but material not immediately required was stock-piled in a big heap on the Galdenoch site. SEPA did not suggest to him that the material should be categorised as waste; they left it to Mr Steel to classify it appropriately, but they carried out monthly inspections and if they had deemed it to be waste they would have notified the defenders. They did not do so. It was Mr Steel's responsibility to complete waste returns to SEPA, and he never included the material in these returns.

[29] Mr Steel stated in cross-examination that the site at Ailsa Gait being developed by R & D was on a hillside, and the developers required to remove a lot of material which would have to be put somewhere; otherwise, the developers would have had to obtain planning permission to create a large hill using this material on their site. He would not have described this material as waste, because the defenders had a use for it, but he confirmed that in expressing this view he was looking at it from the perspective of the defenders and not from the viewpoint of R & D. It was not contaminated material. However, he agreed that if the developers had an intention to discard material, SEPA would regard the material as waste. He was aware that SEPA interpreted waste in terms of the EU Directive, and he would have expected his superiors at the defenders to be aware of this too. Although SEPA considered discarded material to be waste, his own view was that as none of the material was contaminated it was not waste. Following the e-mail of 20 March 2008 (No.6/36 of process) he had further discussions with SEPA as a result of which he was satisfied that he should not include this material as waste, because it was not going to other sites or farmland. If it had been waste, it would have required to be transported under licence. SEPA never raised concerns with him about his non-inclusion of this material as waste.

[30] In addition to the evidence of the six witnesses summarised above, in terms of the joint minute the statements of Alan Davidson and Colin Dempster (Nos. 21 and 33 of process) were agreed as the evidence of these witnesses, subject to the defenders' reservation as to relevancy and admissibility. Mr Davidson was the solicitor who acted on behalf of the pursuers in negotiating their lease with the defenders. Mr Dempster was a contractor who contracted with R & D to transport soil from the Ailsa Gait development to the premises. He had no technical knowledge as to the composition of the material; R & D paid him to take the material to the premises. He did not pay any money to the defenders, and he did not know if R & D paid money to the defenders. In the period from June to September 2008 his company arranged 2,800 lorry trips from Ailsa Gait to the Galdenoch site, transporting approximately 56,000 tonnes of material. The lorries were weighed at the weighbridge and then taken onto the landfill site where the material was tipped. They could not put any soil on the landfill site when there was wet weather.

Submissions for the pursuers
[31] Counsel for the pursuers moved the court to answer the question recorded at paragraph [3] above in the affirmative. The material was generated as an unwanted surplus substance arising as a result of the building operations of R & D; they wanted (and required) to get rid of it. No process was applied to the material between leaving the Ailsa Gait site and arriving at the premises - it was excavated, loaded straight into lorries, and driven to the premises, where it was deposited in a large heap. The defenders did not pay for it; rather, R & D paid to have it removed from their site.

[32] The material did not meet the relevant specification, because it contained stones which were larger than permitted. The stone picking operation was carried out after the material was brought onto the premises. In any event it was clear from Mr Parsons' findings that the presence of these large stones rendered the material disconform to specification. However, whether the waste regulating layer or the restoration materials layer were constructed in conformity with the specification was not a matter central to the pursuers' argument - the pursuers were concerned with the status of the materials entering the premises, not what was done with them after they had been brought onto the premises.

[33] The commercial background to the lease was a relevant factor. Both parties were experienced in relation to commercial landfilling and commercial leases, and both were aware of the relevant European and other provisions relating to the regulation of landfill sites. At the date of the lease, both would have had regard to the general background law (in particular the relevant EC Waste Framework Directive), and would have understood that waste related to materials that were discarded by third parties and included material generated as a by-product of construction work (such as material that required to be excavated and disposed of when houses or other buildings are built). This was consistent with the evidence of Messrs Thomson, Parsons, Walker and Steel. Parties were also aware at the time of signing the lease that inert material would be brought on to the premises for use in the landfill engineering works.

[34] When the lease was signed, the regulatory framework was the same as that contained in Directive 2006/12/EC, Article 1 of which provides:

"1. For the purposes of this Directive:

(a) 'waste' shall mean any substance or object in the categories set out in Annex 1 which the holder discards or intends or is required to discard;"

[35] The present dispute turns on the proper construction of a commercial contract, and in particular Clause 2(3) of the lease. The words of this Clause must be read in the context of the lease as a whole and against the background circumstances which would reasonably have been known to the parties at the time they entered into the lease - Inveresk plc v Tullis Russell Papermakers Limited [2010] UK SC 19, 2010 SC (UKSC) 106. Words used in commercial contracts are to be interpreted in the way in which a reasonable commercial person would construe them, such that the construction reached will comply with business commonsense and the commercial object of the contract - Multi-Link Leisure Developments Limited v North Lanarkshire Council [2010] UKSC 47, 2011 SLT 184.

[36] On the basis of the evidence led, the application of business commonsense requires the language of the lease to be construed in the context of the European Waste Framework Directive. Directive 75/442/EEC (as amended) was in force when the lease was signed, but the definition of waste was the same in that Directive as in the consolidating Directive quoted above. Waste is defined as any substance or object which the holder discards or intends to discard or is required to discard. This is consistent with the SEPA guidance "Is it waste?" and with the evidence of Mr Walker.

[37] Whether or not something is waste will normally depend upon the perspective of the person generating or discarding it - the mere fact that a substance is capable of economic re-utilisation or sale does not in itself remove it from the definition of waste - see the joined cases of Vessoso and Zanetti (C-206/88 and C-207/88), and Scottish Power Generation Limited v Scottish Environment Protection Agency 2005 SLT 98. This approach to what constitutes waste is consistent with the approach of the Scottish Courts as to what constituted waste in a different statutory context, namely the Control of Pollution Act 1974 - see H L Friel & Son Limited v Inverclyde District Council 1995 SLT 1310. Although in a different context involving statutory interpretation, the analysis of the court was correct and relevant to the issue presently before the court. Counsel also referred to the decision of the Northern Irish Court of Appeal in Department of the Environment and Heritage Service v Felix O'Hare & Co Ltd and Phillips Contracts [2007] NICA 45. Although the court in that case was again concerned with the interpretation of a particular statutory regulation, the analysis of whether soil and clay excavated from a building site and transferred to another site was to be regarded as waste was closely analogous to the present case.

[38] Counsel reiterated that the important issue for the purpose of considering the present question was the proper categorisation of the material as it entered the premises - what happened to it thereafter, and whether or not anything was done to it within the premises, was not relevant. Businessmen engaged in the agreement of a lease of landfill premises were bound to be (and on the evidence were in fact) aware of the European regulatory framework; they would regard waste as any substance or object which the holder discards or intends to discard or is required to discard. This included soil and related materials which required to be excavated and disposed of in the course of construction of a housing development. This was consistent with the ordinary meaning of the phrase "inert waste". The question posed should be answered in the affirmative.

Submissions for the defenders
[39] Counsel for the defenders moved the court to sustain their second plea-in-law and to grant absolvitor. There are two principles of contractual construction relevant to the present case. First, one must ask what is the natural and ordinary meaning of the words used in the document - Charter Reinsurance Co Ltd v Fagan [1997] AC 313; Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657. Second, a commercial contract should be given a commercially sensible construction: Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749; Bank of Scotland v Dunedin (supra); L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235. The reference by counsel for the pursuers to the perspective of a businessman operating in this field does not advance matters; the EU Directive and other statutes and regulations are irrelevant to the present issue, because they do not deal with private contractual rights. There was no indication in the present case of a common intention on the part of the contracting parties to contract in the context of a regulatory framework, whatever that might be. The pursuers formulated their argument in several different ways, which indicated the vagueness and ambiguity of their position, and supported the defenders' contention that there was no intention to contract on the basis contended for by the pursuers. What was meant by the "general regulatory framework" in paragraph 3.3.2 of the pursuers' submissions, or the "general background law (in particular EC Regulation)" in paragraph 3.3.3? Under reference to paragraph 4.2 of the pursuers' submissions, there is a lack of any evidence or legal foundation to support the argument that there was a common intention of the parties to contract on the basis of the language as used in the 1975 EU Directive. The lease was not a contract which was intended to give effect to a particular EU Directive, as some contracts are - eg White v White and the Motor Insurers Bureau [2001] 1 WLR 481. Although the EU legislation may be background to the contract, to use the words of Lord Cooke of Thorndon at paragraph 35 of White, "The principle of European compatibility may have little or no weight in interpreting a contract between private parties only, especially if there is no ground for attributing to them a common intention to contract with reference to European law". There was no clear indication that the parties did have a common intention to use the expression 'inert waste' under reference to the meaning of waste in EU law. There was no suggestion in Mr Davidson's witness statement to EU law, nor that he was instructed to use the expression under reference to its meaning in EU law. Any views of Mr Thomson in this respect were merely subjective, and there was no evidence that these were ever communicated to the defenders.

[40] Moreover, it was not clear to which EU regime the pursuers were referring - was it the EU Waste Directive or the EU Landfill Directive, or the UK Regulations or the Landfill Tax regime? In any event, the EU Waste Directive does not contain any definition of the term "inert waste", and the definition of "waste" in EU law is a difficult question to which there is no clear answer. It is unlikely that the parties would have imported such a "definition" into their contract. Counsel referred me to the definitions of "waste" and "discard" in the Oxford English Dictionary.

[41] The present case falls to be contrasted with the situation in which parties to a contract have expressly incorporated a statutory definition into their contract; in that situation, the court seeks to construe the statutory words in their contractual context - Farstad Supply A/S v Enviroco Ltd [2011] UKSC 16. The parties to the lease in the present case have clearly not done this. For all these reasons, EU law and the statutory landfill tax regime have no relevance to the proper construction of the expression "inert waste" in Clause 2(3) of the lease. This case is not about EU law - it is about the construction of a private bargain between two private contracting parties. The present case is quite different from the cases of Scottish Power Generation and Felix O'Hare - questions as to the aims of the EU Directive do not arise here, nor are there any definitions of terms such as "holder" or "producer" in the lease in the present case. The driver for the definition of these terms in the Directive or the Regulatory regime is the protection of the environment; there is nothing to suggest that the private contractual arrangements in the present case have such a driver. The only reference in the pre-agreement correspondence to any statutory regime is to landfill tax (see No. 6/9 of process) - there is no reference anywhere to the EU Directive. There was no evidence that SEPA's position before 2004 was fixed - there was no evidence of SEPA's position at that time, nor that it was known to the parties to this lease. The specification of what was understood as the common commercial background is not supported by the evidence in this case.

[42] Counsel for the defenders went on to consider the evidence as to the steps and materials involved in the capping and restoration of Areas 1, 2 and 3 and also in Cell 1 and the arrangements which led to the Ailsa Gait soil being used at the Galdenoch site. This aspect of his submissions, together with an analysis of whether the material brought on to the premises conformed to the defenders' specification, whether R & D discarded the material, and whether the material was put to a specific use, was considered at paragraphs 25 to 143 of the defenders' written submissions. I have taken all of this material into account but I do not consider that it is necessary to repeat it here. Counsel submitted that if the material brought on to the premises met the defenders' detailed specification, this was a relevant factor in deciding whether or not the material was waste. It was important that the material was inspected on delivery, at which time it might have been accepted or rejected (although none of the material was in fact rejected). Although inspection occurred after the material was brought on to the premises, this was only the end check; if the material had been rejected at that time (for example because it was contaminated or was otherwise contrary to specification) it would have been placed into the lined area of the waste fill site, it would have been classified as inert waste and a royalty rent would have been payable. This did not in fact happen. This was because the material was not useless - it had a purpose, and in order to be accepted it had to be fit for this purpose. The soils were selected for this specific use - hence the need for reports, laboratory results, and inspections. The pursuers' expert witness, Mr Parsons, accepted that the soils had been selected to meet the specifications and had been put to use by the defenders. This was not consistent with the material being "waste". Dr Keogh and Mr Steel were correct in their assessment that the material was not waste - it was a product which had a use. For all these reasons counsel submitted that the question put to the court should be answered in the negative, with the result that either decree of absolvitor should be pronounced, or the case should be put out By Order in due course.

Discussion

[43] It is appropriate to note at the outset that the exercise in which I am involved in the present case is to determine the proper construction of a private commercial contract. The principles which should govern such an exercise have been expounded at the highest level on numerous occasions (perhaps with slight differences of emphasis), and although counsel in the present case relied on different authorities for their propositions in this regard, I do not think that there was much (if any) substantive disagreement as to what these principles are.

[44] Without seeking myself to set down or embellish any rules of construction of general import, in the context of the present case I consider that the most important principles may be stated as follows:

(i) The starting point is to ask what is the natural or ordinary meaning of the words used, in the context of the contract as a whole - Charter Reinsurance Co Ltd v Fagan, per Lord Mustill at page 384; Bank of Scotland v Dunedin Property Investment Co Ltd per the Lord President at page 661.

(ii) Commercial contracts are construed in the light of all the background which could reasonably have been expected to be available to the parties in order to ascertain what would objectively have been understood to have been their intention - Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd, per Lord Steyn at page 771; Inveresk PLC v Tullis Russell Papermakers Ltd, per Lord Hope of Craighead at paragraph [23].

(iii) A commercially sensible construction should be adopted; the construction should comply with business commonsense - Multi-Link Leisure Developments Ltd v North Lanarkshire Council, per Lord Hope of Craighead at paragraphs [19] to [21], and the cases referred to there.

[45] It follows that the exercise in which I am engaged is not identical to that in which courts have required to construe EU Directives or statutory regulations in the context of criminal sanctions or judicial review of notices given under regulatory regimes. It may perhaps be the case that these directives or regulations are relevant to the present exercise as forming part of the wider background to the contract. In this regard, it may be that authorities such as Scottish Power Generation Ltd v Scottish Environmental Protection Agency, H L Friel & Son Ltd v Inverclyde District Council, or Department of the Environment and Heritage Service v Felix O'Hare & Co Ltd provide some assistance; however, in looking at these authorities it must be borne in mind that the courts in these cases were engaged in a different exercise.

[46] Looking to the language of Clause 2(3) of the lease in the context of the contract as a whole, the expression "inert waste" falls to be contrasted with "putrescible waste". The latter was described in evidence without contradiction as every day household waste - the sort of rubbish that is collected in black bin bags and removed by a local authority or its contractors to be placed in the lined areas of waste disposal sites such as the premises. Clearly the parties to the lease envisaged that not all material entering the premises would comprise putrescible waste, and a different regime for Royalty Rent was devised for inert waste. Moreover, on the face of Clauses 2(3) and 8.8 of the lease, the point at which the material falls to be categorised is the point of entry. No doubt if it was discovered after material thought to be inert waste entered the premises that it was not in fact inert waste, but putrescible waste or otherwise contaminated, arrangements could be made for the material to be disposed of appropriately or removed from the site: this was discussed by Dr Keogh and Mr Steel in their evidence. However, if processes were applied to the material after it entered the premises to render it conform to any specification required by the defenders, such processes would not affect its status, because the tempus inspeciendum was when it entered the premises.

[47] What is the natural or ordinary meaning of "inert waste" in the context of this lease, and does the material removed from R & D's site and taken to the premises fall within the natural and ordinary meaning of waste? It was of no use to R & D. It was an unwanted by-product of their residential development. It was a surplus caused by the need to provide flat foundations for houses being built on a sloping site, and even if it could have been retained on the site being developed, it would have created a hill which would have occupied space and (on the evidence) would have required planning permission. R & D therefore paid haulage contractors to get rid of it. They did not sell it or offer to sell it to anyone, nor is there any evidence that they attempted to market it to the defenders. They did nothing to it. Being of no interest to them, they discarded it. I am of the view that the material, whilst at R & D's development site, fell within the natural and ordinary meaning of waste.

[48] Nothing was done to the material itself before it entered the premises. On the evidence, it was excavated from R & D's Ailsa Gait site, loaded straight into a lorry, and driven to the premises. It was not sifted, graded or subjected to any process. It remained what it was when excavated, namely inert waste material.

[49] It is argued for the defenders that this analysis is incomplete, because it is taken only from R & D's perspective as the owners and disposers of the material. Viewed from the defenders' perspective, this was useful, valuable material. It conformed to the defenders' specification with little or no processing. It was tipped into a pile on the premises, and then spread over the relevant parts of the premises, either as a waste regulating layer or as restoration material; the only steps required were to inspect it, to carry out a stone sifting exercise after it had been spread, and to add peat. It was just the material the defenders were looking for, and it would be madness to call it waste.

[50] However, I am not persuaded that it is appropriate, when considering objectively what the parties to this contract intended by the word "waste", to view this from the perspective of the potential user of material. Anything - or almost anything - can be put to some use by someone. If I demolish a part of my building, I may place rubble, timbers and girders in a skip outside as they are of no use to me and I wish to dispose of them. Such material would, in my view, properly be categorised as waste. It is a by-product of my demolition works. My neighbour may decide to build a shed on his property, and may find the contents of the skip to be exactly what he needs for this purpose, without the need for any processing or engineering in the interim. Notwithstanding the fact that a use may exist for the material, I consider that it remains waste until it is incorporated into my neighbour's shed. At the point that he takes it on his premises it is still waste.

[51] Having consumed all the meat from a roast leg of lamb, I may discard it into my household rubbish. It is useless to me. My dog may have a different view of its usefulness, and may retrieve it for his own purposes - but despite its usefulness to him, it remains waste. In the course of submissions it was suggested that even the product of sewage treatment plants may have a use, as a fertiliser or as a fuel. Almost everything can be put to some use, by someone, somewhere - but this does not necessarily remove the material from the category of waste. In the context of this lease, with its distinction between inert waste and putrescible waste, and in the context of the background which can reasonably be expected to be available to the parties at the time that the lease was executed (to which I shall return shortly), I consider that the material removed from Ailsa Gait and taken to the premises fell within the natural and ordinary meaning of inert waste. The expression "inert waste" must be given some content. In ordinary English usage, I consider that the material in the present case discarded by R & D was waste.

[52] Mr Parsons expressed the view in evidence that surplus sub-soil from a building site would be waste, and in order to take it out of the waste chain it would have to be put through a licensed treatment. Whether or not a licensed treatment is required in order to effect this change in categorisation, I consider that the material would at least require to undergo some process, or actually be put to some use, before its categorisation as waste would change. At the point at which it was brought onto the premises, it had undergone no such process, nor had it been put to any use. It had been discarded by R & D, loaded onto lorries on their instructions, and transported to the site. It still belonged to R & D, and was effectively under their control (or that of the haulage contractors transporting it on their behalf). Nothing had happened to change its character from waste to something else before it was brought onto the premises.

[53] Although I have referred to the need for care when considering authorities concerned with the interpretation of EU or other regulatory regimes, it is worth noting in passing that the conclusion which I have reached is the same as the conclusion in these authorities. In Vessoso & Zanetti the court ruled that "the concept of waste, within the meaning of Article 1 of Council Directive 75/442/EEC and Article 1 of Council Directive 78/319/EEC, is not to be understood as excluding substances and objects which are capable of economic reutilisation. The concept does not presume that the holder disposing of a substance or an object intends to exclude all economic reutilisation of the substance or objective by others". In Scottish Power Generation Ltd v Scottish Environment Protection Agency Lord Reed held (at paragraph [135]) that for the purposes of Directive 75/442 "waste may be of economic value, and ...its holder may be said to 'discard' it notwithstanding that he puts it to some commercially valuable use". H L Friel & Son Ltd v Inverclyde District Council was concerned with the question whether ash and building rubble constituted waste for the purposes of the Control of Pollution Act 1974. It was argued that they were not waste because they were not unwanted and there was a resale market for them. The Extra Division observed that "it is difficult to see how the ash and building rubble could be said not to fall into the category of 'waste' within the meaning of the Act in the hands of the original owners who disposed of them. Accordingly that was their status at least up to the time when the appellants deposited them on their site. Until some further physical process had been applied to them to change their character, it is not obvious how the arrival of a third party purchaser could by itself make any difference". In Department of the Environment and Heritage Service v Felix O'Hare & Co Ltd the court was concerned with whether soil and clay removed from a site in advance of the erection of an extension to a building was controlled waste under the Waste and Contaminated Land (Northern Ireland) Order 1997. In holding that it did constitute waste for that purpose, the court observed that this soil when excavated represented material which had to be disposed of in some manner. It had to be got rid of or, in the terms of the Directive, "discarded". While I accept the point made by counsel for the defenders in the present case that these authorities may not take the pursuers' case much further, their reasoning is at least not inconsistent with the views which I have expressed above.

[54] Is there anything in the facts and circumstances surrounding the signing of the lease which might render the view which I have expressed above contrary to business common sense? I cannot identify any such fact or circumstance. The view which I have taken results in the defenders requiring to pay more by way of Royalty Rent to the pursuers than if I had taken the opposite view, but there was no evidence before me to suggest that this was contrary to business common sense. Both the pursuers and the defenders had experience of the regulatory regime and were aware of the terms of Directive 75/442/EEC. While I accept and agree with the observation of Lord Cooke of Thorndon in White v White quoted at [39] above, in the context of a lease for such a heavily regulated use as a landfill refuse site and civil amenity waste disposal site I find it difficult to accept that parties did not have in mind when contracting in terms of this lease the regulatory regime in force, and in particular the definition of waste in that regime. Mr Thomson stated that he was in fact aware of this, and Mr Steel accepted readily that he was aware of the definition of waste provided by the EU Directive (and repeated in SEPA's guidance) and he would expect those higher up in the defenders' organisation to be aware of this. I consider that the definition of waste in the regulatory framework, whilst not determinative of this issue by itself, is a relevant piece of the background which could reasonably have been expected to be available to the parties, and it is a factor to which I am entitled to have regard in order to ascertain what would objectively have been understood to have been their intention when they contracted. It is a factor which provides some support for the pursuers' position.

[55] It is appropriate that I should deal at this stage with the objection made by counsel for the defenders to the admissibility of certain parts of the evidence of Mr Thomson and Mr Walker, referred to at paragraph [5] above. With regard to Mr Thomson, counsel suggested that parts of his evidence were inadmissible on two grounds - (a) because he was attempting to give evidence as to how the court should construe the lease, and as this is a question of law and entirely for the court it was irrelevant, and (b) because he was stating his subjective understanding or intention when entering the lease, which is irrelevant because the lease requires to be construed objectively. I accept that the proper construction of the lease is a question of law for determination by the court, but I did not understand Mr Thomson to be seeking to trespass on the court's function. If he did so, I attach no weight to his evidence. I also accept that the lease requires to be construed objectively, and that Mr Thomson's subjective understanding of what was agreed is not relevant; however, I consider that Mr Thomson's evidence at paragraphs [6] and [7] is relevant as the contextual commercial background, and also to the issue of business common sense. To this extent I consider that it is admissible. Counsel for the defenders' objection to the evidence of Mr Walker was that he was giving evidence about the legal definition of a term in the lease, and this was a question of law for the court. Counsel for the pursuers observed that it was the defenders who raised in averment the position of SEPA, and it was for that reason that Mr Walker was called to give evidence about SEPA's position. I agree with the submission made for the defenders in this regard, and sustain the objection. It seems to me that what Mr Walker understands waste to be, or what SEPA understands waste to be, is neither here nor there. I did not find Mr Walker's evidence to be relevant or of assistance.

[56] Some time was taken up at the proof with detailed evidence from Mr Parsons and Dr Keogh as to whether the material which was spread on the site as the waste regulating layer or as restoration materials conformed to the defenders' specification. On this matter I preferred the evidence of Dr Keogh to that of Mr Parsons. I was satisfied that in general the material spread on the relevant parts of the site conformed to specification. Dr Keogh had a much greater involvement with the site, and a greater knowledge of the materials spread on it, than did Mr Parsons. Furthermore, I accept Dr Keogh's criticisms of the methodology adopted by Mr Parsons; I do not consider that the results of one test hole in the context of such a large area can be relied on as being an accurate representative sample. However, I agree with counsel for the pursuers that operations or processes such as stone picking, inspecting and spreading which were carried out after the material was brought on to the premises are irrelevant, because what the lease is concerned with is the status of the material when it is brought on to the premises. Indeed, for the reasons given above, I do not consider that the question whether the material was conform to the defenders' specification is per se relevant to the question before me. It is only if the material had been subject to some process between the time that it was discarded by R & D and the time it entered the premises in order to conform to the defenders' specification that the question of conformity might have some relevance, but there is no suggestion that this happened - indeed, the evidence is to the contrary.

[57] I have considered the evidence about the background to the contract and the surrounding facts and circumstances ("the factual matrix"), and there is nothing that I can identify in it which causes me to change my view as to the natural or ordinary meaning of the words used in the lease, nor is there anything which suggests to me that this construction runs contrary to business common sense. Accordingly I answer the question posed at paragraph [3] above in the affirmative. The case will be put out By Order in early course to enable parties to address the court as to any further procedure which may be required.