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ABDUL MAJID & SON LTD FOR JUDICIAL REVIEW [2023] ScotCS CSOH_41 (30 June 2023)
URL: http://www.bailii.org/scot/cases/ScotCS/2023/2023_CSOH_41.html
Cite as:
[2023] CSOH 41,
2023 SLT 740,
2023 GWD 25-215,
[2023] ScotCS CSOH_41
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OUTER HOUSE, COURT OF SESSION
[2023] CSOH 41
P803/22
OPINION OF LORD YOUNG
in Petition of
ABDUL MAJID
& SON LIMITED
Petitioner
for
Judicial Review of the Determination of the Return Handling Fee dated May 2022 in relation
to Scotland's Deposit and Return Scheme
Petitioner: O'Neill KC; Welsh; TLT LLP
Respondent: Lindsay KC; Addleshaw Goddard, acting for Circularity Scotland Limited
30 June 2023
Issue
[1]
This petition concerns an aspect of the Deposit and Return Scheme (DRS) shortly to
be introduced in Scotland. The two issues raised in the petition are (i) whether the
respondent is entitled to set the "reasonable handling fee" (RHF) payable under the DRS,
and (ii) what factors must be taken into account in setting this fee.
Background
[2]
The DRS is a scheme for the return of single use drinks containers sold within
Scotland. The statutory power for the implementation of the DRS can be found in section 84
of the Climate Change (Scotland) Act 2009 which enables the Scottish Government to
2
establish by regulations a deposit and return scheme. The DRS has been established by
virtue of the Deposit and Return Scheme for Scotland Regulations 2020 (SSI 2020/154).
[3]
A brief description of the DRS is necessary to understand the issues in this case. The
basic structure of the scheme is that single use drinks containers sold in Scotland will
become subject to a 20p deposit. Each container's packaging will be marked to make clear
that return of that packaging will enable the consumer to recoup the deposit. The consumer
can return the packaging and collect their deposit at any return point. Most retailers of these
drinks containers will be obliged to operate a return point. The aim of the scheme being that
it should be as easy for the consumer to return the empty container as it is to buy the
original product. A retailer operating a return point is termed a return point operator
(RPO). The RPO may acquire a reverse vending machine for their premises which will
enable the collection and storage of packaging to be automated, or the RPO may operate a
manual, over-the-counter collection service. Producers of the packaging must arrange for
the collection of their scheme packaging from each RPO. The producer is obliged to pay to
the RPO both a sum equal to the deposit which has been returned to the consumer and a
RHF for each item of scheme packaging collected.
[4]
Sections 85 and 86 of the 2009 Act and regulations 13-15 of the 2020 Regulations
allow for the creation and approval of a scheme administrator. It was anticipated that
individual producers would seek to fulfil many of their obligations under the DRS through
the medium of a scheme administrator. The respondent is a private company limited by
guarantee formed to act as scheme administrator and it remains the only approved scheme
administrator for the DRS. A Membership Agreement dated 22 February 2021 between the
respondent and its founding members regulates the operation of the respondent and its
relationship with its members. The founding members include a number of the most
3
significant producers of single use drinks containers in the Scottish market as well as certain
trade associations. Other producers and RPOs may request to become members of the
respondent but are not obliged to do so.
[5]
The DRS was originally scheduled to commence in August 2023. Since the
substantive hearing in this case, the Scottish Government has announced a delay in the
commencement of the scheme until October 2025.
[6]
The petitioner is a limited company which operates a retail convenience store, food
outlet and post office between Bellshill and Coatbridge known as Baba's Kitchen and
Costcutter. The premises comprise approximately 2,500 square feet of retail selling space.
The petitioner participated in an early trial of a form of reverse vending machine in 2019.
The sole director of the petitioner, Mr Majid, was also part of a delegation from the Scottish
Grocers' Federation which visited Norway and Estonia to study the use of reverse vending
machines in operation.
The decision under challenge
[7]
The decision challenged in the petition is a determination of the respondent made in
May 2022 and set out in a briefing document. The relevant part of the briefing document
states:
"The board is pleased to announce that they have reached a determination on the
value of the RHF and is today issuing these fees to industry.
Fees
The RHFs for the first year of operation of the scheme are as follows:
4
Type of RHF
Fee/returned scheme
article
Notes
Manual
2.69p
Automatic (for those RPs
utilising an RVM that
complies with the CSL
RVM specification)
3.55p for the first 8,000
containers received in
each week by the RP
1.35p for each additional
container received in
each week by the RP
Closed loop hospitality
0.13p
Takeback
TBD
More details will be
released in due course
[8]
The briefing note explained that the level of the RHF had been calculated by an
independent entity, PwC, who had been appointed as RHF consultant. In relation to the
methodology used by PwC, the note explained:
"The RHF consultant developed a detailed cost model aligned to the requirements of
the regulations. Data to populate the model was sourced from the broad range of
RPOs that will operate in Scotland, and augmented with and validated by input from
other operating schemes around the world (where appropriate), and major
independent reference points and indices. The model is designed to reflect the
variation in costs across different types and sizes of RPOs and materials".
[9]
In the period between service of the petition and the substantive hearing on the
petition and answers, the respondent issued a RHF review report dated January 2023. The
review report made no change to the RHF for manual and takeback but did raise the two fee
levels for automatic from 3.55p to 3.7p, and from 1.35p to 1.6p.
Legislation
[10]
The relevant parts of regulation 11 of the 2020 Regulations are as follows:
5
"11
.--(1) A registered producer must--...
(e)
within the time limits specified in the producer's operational plan,
collect scheme packaging first made available by that producer to be
marketed, offered for sale or sold for the purposes of its retail sale in Scotland
from any of the following--
(i)
a return point operator,...
(f)
within the time limits specified in the producer's operational plan, pay
to a person from whom the producer has collected scheme packaging in
accordance with sub-paragraph (e) a sum equal to the deposit for each item of
scheme packaging collected,
(g)
within the time limits specified in the producer's operational plan, pay
to the person from whom the producer has collected scheme packaging in
accordance with sub-paragraph (e) a reasonable handling fee charged by that
person for each item of scheme packaging collected,...
(3) The obligations in paragraph (1) must be discharged--
(a)
where the producer is registered in accordance with regulation 7(1)(a),
by the producer, or
(b)
where the producer is registered through a scheme administrator, by
that scheme administrator, in accordance with regulation 16(1)(a).
(4) For the purposes of this regulation--
a "reasonable handling fee" is--
(a)
a fee charged by a return point operator in relation to scheme
packaging returned by a consumer to that return point that takes into account
the following--
(i)
the costs of purchase, lease, maintenance and upkeep of any
reverse vending machine associated with the collection and storage of
scheme packaging,
(ii)
the cost of materials used in respect of the collection and
storage of scheme packaging,
(iii)
the rental value of any floor space utilised solely for the
collection and storage of scheme packaging, and
(iv)
staff time dedicated solely to the collection and storage of
scheme packaging,"
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Submissions for the petitioner
[11]
The petitioner's challenge to the respondent's determination of the RHF is a simple
one. The petitioner contends that the 2020 Regulations do not give the respondent power to
determine the RHF and, even if the respondent had such a power, the RHF has to be based
on the costs of the individual RPO as opposed to costs incurred across all retailers operating
return points. The petitioner's contention is based upon what was submitted to be a proper
interpretation of regulation 11(4). It was further argued that the respondent's approach was
contrary to general principles of EU law and, in particular the principles of proportionality,
equal treatment and unrestricted competition. In that regard, it was submitted that the RHF
set by the respondent was unfair to small enterprises. The petitioner referred to projections
which indicated that it would lose approximately £1,000 a week from operating a return
point at its store. This, it was submitted, would amount to a distortion of competition
between small and large retail enterprises.
Submissions for the respondent
[12]
The Answers and Notes of Argument lodged on behalf of the respondent set out
how the RHF came to be determined in May 2022. It was explained that the DRS was
intended to be an industry-led scheme. The 2020 Regulations set out the basic framework
for the scheme with the detail to be determined by the participants in the scheme. It had
always been envisaged that the DRS would be developed through a number of contracts
including the Membership Agreement and agreements to be entered into between the
respondent and individual RPOs. The Membership Agreement provided in general
principle 22 and rule 4.14 that an independent entity would be appointed to calculate the
RHF. By appointing an independent entity to determine the RHF, it was hoped that this
7
would avoid some of the difficulties which had arisen in deposit return schemes operated in
other countries. PwC had been appointed as the independent entity. PwC had drawn on
data from a wide range of RPOs in Scotland as well as from other similar deposit return
schemes in operation throughout the world. PwC had followed the terms of the
2020 Regulations in calculating the RHF. By adopting a tiered approach in relation to
automated collections, the RHFs calculated were anticipated to be close to cost-neutral for
most RPOs and would not disadvantage small enterprises.
[13]
It was only at the substantive hearing that the respondent's exact position became
clear to the court in relation to the status of the RHF determination issued by it. It was
accepted that the respondent had no statutory power to determine the RHF. Nor was it
contended that there was any contractual obligation by virtue of the Membership
Agreement requiring the petitioner to accept the RHF being put forward by the respondent.
It was submitted that the 2020 Regulations were silent as to who was to calculate the RHF.
The respondent had stepped into that gap and had appointed PwC to determine the
appropriate RHF. The pinch point, according to senior counsel for the respondent, would be
when individual RPOs are presented with a proposed agreement from the respondent
which will include the RHF rates previously announced. It will be at that point for the
individual RPO to sign the agreement or refuse to sign. It was accepted that the respondent
could not impose the announced RHF upon the petitioner. In relation to the interpretation
of the RHF definition, it was submitted that the factors listed at regulation 11(4)(a)(i)-(iv)
refer to general costs experienced by retailers in Scotland as a whole as opposed to
individual costs of the specific retailer's return point. It was said that the reference to the fee
being charged by the RPO was neutral since payments may be said to be charged by one
party even when determined by another. The example of VAT was given.
8
Decision
[14]
As noted in the preceding paragraph, it is accepted by the respondent that it has no
statutory power to set the RHF for any RPO. It is also accepted that the petitioner is not
contractually bound to accept the RHF announced by the respondent. The first issue for
decision, namely whether the 2020 Regulations permit the respondent to impose the RHF
upon the petitioner, falls to be determined in favour of the petitioner.
[15]
It was not submitted by either party that the Climate Change (Scotland) Act 2009
assisted in the construction of the definition of the RHF in regulation 11(4). The only
provision within the 2009 Act which touches upon the RHF paid to retailers is in
section 84(7)(d) which provides that regulations made under the Act may include provision
about:
"(d)
the inclusion, in the sale price of articles, of a non-returnable element to cover
the reasonable costs incurred by retailers, producers or a scheme administrator in
administering such schemes".
The 2020 Regulations have not adopted that potential approach of including a
non-returnable element in the sale price to cover, inter alia, the retailers' handling costs.
[16]
I have concluded that the petitioner's construction of regulation 11(4) is the correct
one and that the four listed factors which must be taken into account in setting the RHF are
by reference to the specific costs of that return point.
[17]
The fee is charged by the RPO and it makes sense for the party charging the fee to fix
that fee by reference to its own cost base which it will be familiar with. Or, to put it another
way, it would be unusual for an RPO to determine the fee charged by reference to costs
incurred by other rival RPOs which is information that it will not have access to. Although
the respondent argued that the person making the charge does not need to be the person
fixing the level of that charge and that is no doubt correct in some situations, the normal
9
expectation is that a party charging for a service will determine the level of that charge by
reference to its own cost base.
[18]
Regulation 11(4) also provides that the fee charged is in relation to scheme packaging
returned to "that return point" which indicates that the same RPO operating a number of
return points may charge a different RHF depending on the costs incurred in operating a
different return point. If the respondent's argument was correct, there would be no need to
differentiate between return points and this phrase could have been omitted from the
regulation.
[19]
The factors listed at regulation 11(4)(a)(i)-(iv) are intimately linked to the manner in
which an individual RPO will collect and process the scheme packaging at "that return
point". There will be differences between operators as to the extent to which staff will be
used or whether the process will be mechanised. The extent of floor space in exclusive use
for the collection and storage of scheme packaging will vary considerably between return
points, as will the rental value of each square foot of floor space. Staff costs and retail floor
space must be "solely" related to the collection and storage of the returned packaging in
order to be relevant for the RHF assessment. The wording in these sub-paragraphs directs
attention to the manner in which the individual RPO operates.
[20]
The structure of the 2020 Regulations is more consistent with the petitioner's
construction than the respondent's. The 2020 Regulations envisage a scheme administrator
being appointed to fulfil the obligations of producers but it is common ground that the
scheme administrator has no statutory power in relation to the determination of the RHF. If
the regulations had conferred such a power on the scheme administrator then it might have
been easier to envisage that an industry-wide analysis of costs was required since a scheme
administrator would have an incentive as well as the resources to approach costs on that
10
basis. By not conferring such a power on the scheme administrator, the clear inference is
that individual RPOs should look to their own costs to determine the RHF which they will
charge.
[21]
Throughout the background papers lodged by both parties there are references to the
aim of cost-neutrality in relation to the RHF. In other words, the RPO should neither profit
by nor lose by collecting and storing the returned packaging. The only qualification on this
aim is that the handling fee be "reasonable" so costs unreasonably incurred by an RPO are
not made good. If regard is had to the costs incurred by the individual RPO as opposed to
industry-wide costs, the aim of cost-neutrality for each RPO is further promoted.
[22]
I have been confirmed in this construction of regulation 11(4) by the terms of the
Accompanying Statement to the 2020 Regulations issued by the Scottish Government. At
paragraph 109 of that document, the Scottish Government's response to the drafting of
regulation 11 stated:
"We are clear that participation in DRS should be cost-neutral for return points and
are broadly satisfied that regulation 11 achieves this. We continue to believe it is
appropriate to vary handling fees to reflect different return-point operating models
and their associated costs."
[23]
I should add that I did not find the parties' submissions in relation to EU principles
of any great assistance in construing regulation 11(4). I am unwilling to accept on the basis
of the limited documentary evidence available at the substantive hearing that the
respondent's approach which includes a tiered system is inherently unfair to small retailers
as a group when compared with larger retailers as a group. I also agree with senior counsel
for the respondent that if there is a competition law issue linked to the level of the RHF then
there is a more appropriate forum for such issues to be resolved. The Competition Appeal
Tribunal is far better equipped to analyse the economic data necessary to demonstrate a
11
detrimental effect on competition. Further, in relation to the principle of proportionality, for
reasons discussed in the following paragraphs, I am not convinced that the respondent's
approach is in clear breach of that principle.
[24]
In advance of the substantive hearing, the respondent lodged an affidavit from
Donald McCalman, the respondent's programme director. Reference was made to that
affidavit to demonstrate that the respondent's approach to the issue of the RHF had fully
complied with EU principles of proportionality, equal treatment and good administration.
For reasons briefly set out at para [23], I did not find the submissions on EU law of any real
assistance in relation to the interpretation of the 2020 Regulations. However, one paragraph
of the affidavit is worth noting in relation to the approach to regulation 11(4). The
paragraph sets out the respondent's view on the practical difficulties which would arise if,
as I have concluded, regulation 11(4) falls to be construed as the petitioner submitted:
"41. From a practical perspective, if individual RPOs set their own RHF this would
require a substantial additional investment in CSL systems and resources to review
and engage with as many as 25,000 individual businesses and to make significant
changes to IT systems to allocate specific fees to each company. This investment
would be permanent to accommodate annual reviews and other changes. The cost
impact would feed directly onto the price of drinks in Scotland and so directly
impact consumers."
[25]
It is easy to understand the concern expressed by Mr McCalman where a scheme
administrator is faced with individual RPOs setting their own RHF by reference to their
individual costs. This might also be a concern to some individual RPOs. While the DRS is in
its infancy, an individual RPO will have limited information on the costs involved in
operating their return point. The amount of scheme packaging to be returned via each
return point is unknown. The absence of any bespoke dispute mechanism within the
2020 Regulations means that any dispute between an individual RPO and the respondent as
to that RPO's reasonable costs would require to be resolved in court proceedings. This is
12
likely to be an expensive and time-consuming process for an individual RPO involving the
engagement of accountancy and economic experts. These considerations might cause some
RPOs to favour an industry-wide RHF provided that the RHF arrived at was close to their
own anticipated costs. However, the difficulty for the respondent is that it must operate
within the terms of the regulations as enacted. If the practical implementation of
regulation 11(4) was thought to be impractical or excessively costly then the solution for the
respondent was to ask the Scottish Government to reconsider the terms of that regulation.
What the respondent has sought to do is to adopt an approach which may have some
practical benefits to commend it, but which ignores the clear wording of regulation 11(4).
The petitioner is entitled to insist that the setting of the RHF fee for its return point follows
the approach set out in the regulations.
[26]
I wish to make clear that although I have concluded that the respondent's approach
to regulation 11(4) was in error, it does not necessarily follow that the RHFs calculated by
PwC are of no value. On the reasonable assumption that the data used by PwC is broadly
based and has been appropriately analysed, the RHF levels proposed by the respondent may
be close enough approximations for many RPOs. Individual RPOs might be happy to accept
the RHF figure put to them by the respondent as being a close approximation to their costs.
For some RPOs, the RHF on offer may be attractive and acceptable simply to avoid the
difficulty of isolating and analysing the costs associated with their own return points on an
annual basis. But on the basis of regulation 11(4), individual RPOs can insist that the RHF
which they charge is to be calculated by reference to their own reasonable costs in collecting
and storing the scheme packaging.
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Disposal
[27]
As suggested by parties, I shall have the case put out by order to discuss the disposal
of pleas-in-law and the terms of any declarator. The issue of expenses is reserved meantime.
