The decision in Thames Water Utilities v Ministry of Defence (Court of Appeal 29 November 2006 EWCA Civ 1620) will come as a relief to undertakers because it overrules the decision of the Birmingham Technology and Construction Court in January 2006 which held that a sewerage undertaker was entitled to charge only for services actually provided to the customer.
The service in this context meant the disposal of the volume of water discharged. If that decision had been upheld on appeal it would have implied a revision of many charges schemes and the reimbursement of many customers.
The statutory charges scheme made by Thames Water and approved by the Director General of Water Services under the Water Industry Act 1991 (and, since April 2006, the Water Services Regulation Authority) allowed for sewerage charges to be set by reference to the volume of water supplied to premises. However, an allowance was made if it could be shown that more than 10% of the water supplied was not in fact discharged to the public sewers, unless due to leakage.
During the original trial, the Ministry of Defence had alleged that in relation to one military barracks between 1996 and 2004, Thames Water had mistakenly overcharged it by calculating charges based on water entering the site rather than entering the sewers, which was much lower due to leakage.
The MoD claimed that, at the time of the initial action, it had not realised the charges were being based on the volume of water entering the site. The Court of Appeal was sceptical about this claim given the basis for the charges had been indicated clearly on the bills.
Lord Justice Moses scathingly noted: "No one, least of all those responsible in the MoD for the efficient management of the disposal of waste, can seriously expect the case to proceed even in the Court of Appeal, on the basis that someone believed that the volume of water discharged into the sewers from the barracks would be the same as the volume of water supplied to that barracks.
"It does not matter whether the difference between the volume of water discharged and the volume of water supplied is the result of an unknown leak or of water used to refresh flowers outside the sergeant’s mess."
The court considered that the core issue was one of law rather than fact, and essentially boiled down to whether a charges scheme based on volume supplied was consistent with the statutory provisions of the Water Industry Act.
Section 143 of the Act allows undertakers to make a charges scheme where customers pay for "any services provided", with section 144 giving considerable discretion over the methods and principles used. Under the Act, the principal duty of a sewerage undertaker is to provide a system of public sewers and to empty those sewers.
During the initial trial the judge adopted a restrictive approach to the meaning of the services in the context of the charges scheme. But during the appeal Lord Justice Pill pointed out that the general interpretation section of the 1991 Act provided that "services" included "facilities" and that "sewerage services" included the disposal of sewage and any other service required to carry out the undertaker’s function: "Thus the services provided by the undertaker include sewage disposal and other services (which include facilities) required for the purpose of carrying out those functions of a sewerage undertaker. These may include pumping stations and sewage disposal works."
In that context, the court considered that the MoD’s argument that charges could only be set by reference to the amount of water entering the sewers was "untenable". According to Lord Justice Pill, "to demonstrate that charges are based on a volume of water not all of which enters the sewers does not demonstrate that Thames Water is charging for services not provided."
The court also considered whether an action concerning the charges scheme should have been made via a complaint to the Director General under the statutory provisions or a judicial review against the Director General on the ground that in approving the scheme he had misconstrued the term "services".
Section 18 of the 1991 Act provided that remedies for contravention of licence conditions imposed on undertakers should be only those provided for in the Act. And in the 2004 Marcic case, the House of Lords had emphasised the importance of using statutory remedies and the Director General’s expertise rather than common law judicial remedies.
Nevertheless, as Lord Justice Moses pointed out, the Marcic decision did not totally exclude the right to bring an action which did not derive from the statutory provisions "if there was a genuine case for restitution of sums overpaid, for example by virtue of a faulty operation of a meter designed to measure the volume of supply, it was not barred by the 1991 Act."
However, he noted that this case was essentially concerned with the legality of the charges scheme’s basis: "The assessment of a fair basis of charge is highly complex and skilled. It can only properly and fairly be undertaken by experts, such as the Director and now the Water Services Regulations Authority."
Amendments to the 1991 Act which came into force in April 2006 reflect this approach by giving power under Section 150A to the Secretary of State to make regulations providing for disputes over bills to be referred to the WSRA.
Regulations have yet to be made, but the Court of Appeal decision may hasten their introduction to avoid similar litigation in future.