This is potentially huge. There could be millions of pounds at stake and possibly many councils and housing associations affected. It might only mean a pound or so per tenant per week, but definitely 37,000 and potentially 375,000 tenants are involved, over periods of years.
Jones v London Borough of Southwark  EWHC 457 (Ch)
Quite a lot of councils have agreements with water suppliers under which the council will collect water charges from their tenants, effectively as an addition to the rent. This case concerned a challenge to the nature and validity of Southwark’s agreement, at least before 2013.
We have seen such agreements raised before, for instance in London Borough of Southwark v Ofogba  EWHC 1620 (QB), Lambeth LBC v Thomas (1997) 30 HLR 89 and Rochdale MBC v Dixon  EWCA Civ 1173. The latter two cases concerned the vires of such agreements, which were taken to be ‘agency agreements’, while Ofogba raised a similar issue to this case, but was lost at County Court.
The key issue in this case was whether Southwark was acting as Thames Water’s agent in collecting water charges from their tenants, or whether Southwark was actually a ‘re-seller’ for the purposes of The Water Resale Order 2006. This is significant because the 2006 Order imposes maximum charges on re-sellers and allows only for modest administration charges.
Ms J had been a Southwark tenant since 1981 and paid the water rate to Southwark with her rent, as do some 37,000 tenants of unmetered Southwark properties. The rates vary, but are typically around £5 per week.
At issue was the period between 2000 and 2013. In 2013, following counsel’s advice in the wake of the Ofogba case, Thames Water and Southwark entered into a deed of clarification and amendment dated 23 July 2013. It was common ground that if effective, this deed would stop Southwark being a ‘re-seller’. The effectiveness of the deed was disputed, but as Thames Water were not a party to the present case, any decision on the validity of the deed was adjourned to enable Thames to be joined.
Key to the case were a 2000 Agreement between Southwark and Thames Water, and Thames Water’s ‘Charges Schemes’ between 2002 and 2010.
The charges schemes all contained a passage like:
a) The person responsible for payment of charges under this scheme shall be the occupier of the relevant premises to which the supply is made except where some other person is liable by agreement with Thames Water.
b) Where there are two or more people occupying the relevant premises to which the supply is made, the occupiers shall be jointly and severally liable for the payment of the charges.
c) Where the relevant premises to which the supply is made is let on a tenancy of less than twelve months or licence, the owner of the premises shall be regarded as the occupier and be liable for charges except where some other person has paid the charges or is liable by agreement with Thames Water.”
All Southwark’s tenancies are weekly periodic, thus for less than 12 months. The Court held that while Southwark could not reasonably be considered to be an occupier:
I nonetheless take the view that a charges scheme can properly provide (as Thames Water’s charges schemes formerly did) for the owner of premises to be chargeable where they are “let on a tenancy of less than twelve months or licence”. In such a situation, the owner might be said to be a person “to whom the undertaker provides services or in relation to whom it carries out trade effluent functions” (within the meaning of section 142(1)(b) of the WIA) even if the occupier is also to be treated as receiving the services under section 144(1). Where that is so, it will, I think, be possible for a scheme to determine which of those to or in relation to whom services are being provided is to be responsible for the charges.
The significance is that Thames Water were charging Southwark as owner, and Southwark then charging its tenants. Effectively, a re-seller.
Then there was the 2000 Agreement. This was in terms as follows:
“1 Premises Affected
1.1 THIS Agreement covers all of the Premises where the water supply given by the Provider is not measured by a meter (‘the Unmeasured Premises’).
2 Liability For Charges
2.1 THE Customer shall pay for all of the Provider’s charges (‘the Charges’) in respect of the Services provided to the Unmeasured Premises.
2.2 THE Charges will be raised by applying the relevant tariffs (‘the Tariffs’) for the Services, less the allowances and reductions to which the Customer is entitled under Clause 3.
2.3 THE Tariffs will be those that are in force at the relevant time by virtue of inclusion in Charges Schemes made by the Provider under Section 143 of the [Water Industry Act 1991].
3. Allowances and Reductions
3.1 THE Tariffs will be reduced by 5% in recognition of the fact that in any given year a number of the Unmeasured Premises are likely to be unoccupied for a period of less than three months.
3.2 FOLLOWING the deductions under Clause 3.1 the balance of the Charges will be reduced by a further 18% by way of the Customer’s commission.”
And at clause 4.6: “THE Customer shall send the Provider an invoice … in respect of any Value Added Tax that is payable in respect of the Customer’s commission referred to in Clause 3.2.”
So Southwark paid Thames Water an overall sum for unmeasured properties (apparently quarterly), but with a voids rebate of 5% and a ‘commission’ of 18% deducted from the amount payable by Southwark. Southwark then demanded apportioned and weekly water rate payments from their tenants, in the full amount of the Thames Water listed charge for that property.
Southwark argued vigorously that this was an agency agreement, that Southwark were, in effect, simply doing debt collection on behalf of Thames Water. However, they did admit that the 5% voids rebate (actual voids currently about 1.35%) and the 18% commission, supposedly for administration and the risk of non-payment, were “an important source of funding for Southwark”, as Southwark got to keep any extra raised from direct demands on their tenants.
The Court held, after an excursus on contractual interpretation after Arnold v Britton, and on the findings in Lambeth v Thomas and Rochdale v Dixon, that this was not an agency agreement and that Southwark were indeed ‘the customer’. The list of reasons:
i) Clause 2.1 of the 2000 Agreement provided for Southwark to pay for “all of the Provider’s charges … in respect of the Services provided to the Unmeasured Premises”, reflecting a recital to the effect that Southwark would “pay for the Services in respect of the Premises”. It is common ground that Southwark was thereby obliged to pay “the Provider’s charges” regardless of what (if any) sums it received from its tenants. The alleged principal (Thames Water) was to have no interest in moneys collected by its alleged agent (Southwark);
ii) While calculated by reference to tariffs contained in charges schemes (see clauses 2.3 and 2.3 of the 2000 Agreement), the sums that Southwark had to pay to Thames Water did not correspond to the total of the sums that tenants were required to pay. What was due from Southwark was a net sum, after “allowances and reductions” had been deducted;
iii) A linked point is that the 2000 Agreement made no provision for Southwark to account to Thames Water. That is unsurprising since the idea was evidently that Southwark should have an unconditional obligation to pay “the Provider’s charges” and no liability to make any further payment. The absence of an accounting obligation is, however, significant. “[T]he duty to account is a typical feature of the agent’s position” (Bowstead & Reynolds on Agency, 20th ed., at paragraph 1-032, citing Michelin Tyre Co Ltd v Macfarlane (Glasgow) Ltd  2 SLT 205);
iv) In other respects, too, the usual incidents of agency were missing from the 2000 Agreement. There was, for example, no provision for Thames Water to exercise any control over Southwark (compare Bowstead & Reynolds, at paragraph 1-017) or for Southwark to exercise diligence, care or skill (compare Bowstead & Reynolds, at paragraphs 1-016 and 6-017);
v) The 2000 Agreement also omitted any reference to Thames Water giving Southwark authority to collect money from the tenants. Yet it is of the essence of agency that the agent should be able to affect the principal’s legal relations with third parties (see Bowstead & Reynolds, at paragraphs 1-001, 1-003 and 1-004);
vi) If I am right in thinking that Thames Water’s charges schemes imposed liability for water and service charges on Southwark between 1 April 2002 and 31 March 2010 (as to which, see paragraphs 30-37 above), there can have been no possibility of Thames Water authorising Southwark to collect such charges from its tenants on Thames Water’s behalf during this period. The tenants would not have owed any money to Thames Water;
vii) The 2000 Agreement referred to Southwark as “the Customer”. Although I doubt whether the parties should be taken to have had in mind the definition of “customer” to be found in section 219 of the WIA, the fact remains that an agent would not generally be termed a “customer”;
viii) Mr Bourne (for Southwark) noted that an unconventional meaning can be attributed to a word in a contract if the parties habitually used the word in that sense. While, however, there is evidence that the parties sometimes used the word “customer” loosely, Southwark has not come close to demonstrating that “customer” was habitually used in a particular way that could explain a true agent being so described in a formal document;
ix) The 2000 Agreement’s use of “Customer” is counterbalanced by its use of “commission”. However, “the mere use of labels … will not be decisive” (see paragraph 42 of Rix LJ’s judgment in Rochdale) and, unlike normal commission, this “commission” did not depend on any performance or the happening of any event. In practice, it simply served to reduce what Southwark had to pay Thames Water;
x) That leads to the next point: that the mere fact that the parties may have referred to their relationship as one of “agency” and to Southwark collecting water and sewerage charges “on behalf of” Thames Water is of no real importance. “[T]here is no magic in the word ‘agency’. It is often used in commercial matters where the real relationship is that of vendor and purchaser” (Ex p White, re Neville (1871) LR 6 Ch App 397, at 399; see too Bowstead & Reynolds, at paragraph 1-032);
xi) In the Lambeth case, the focus appears to have been on whether Lambeth was acting “on behalf of” the water company for the purposes of paragraph 20 of schedule 1 to the Water Consolidation (Consequential Provisions) Act 1991 rather than on whether a relationship of agency in the strict sense existed. In any case, “it is not entirely clear what issues were taken” (see paragraph 48 of Rix LJ’s judgment in Rochdale);
xii) How the parties have conducted themselves since entering into the 2000 Agreement can be of little or no significance (see e.g. Lewison, “The Interpretation of Contracts”, 6th ed., at 179-189), but, in case it matters, it can be observed that the parties’ behaviour has not obviously been entirely consistent with an agency relationship. By way of example, Southwark’s charges to its tenants have not accorded with Thames Water’s tariffs in every respect (e.g. as regards charging for garages); Southwark has considered itself to be entitled to make decisions without consulting Thames Water as to what, if any, steps it should take to recover charges from tenants; and Thames Water has sent bills to Southwark referring to its “Commitment to our customers” and “several Codes of Practice including a guaranteed standards scheme” and none to the tenants; and
xiii) Although the 2006 order may make a sale and re-sale arrangement disadvantageous to Southwark, no Water Resale Order had yet been made at the date of the 2000 Agreement.
So, that was that on the re-seller issue. At least for the period 2000-2013 Southwark were found to be a re-seller of water and sewerage services.
The significance of this, to return to the 2006 Order (and similar terms in a 2001 order), was that
paragraph 6(2)(b)(i) of the 2006 Order focuses on the “amount payable by the Re-seller to the Relevant Undertaker”. Under the 2000 Agreement, Southwark had to pay Thames Water only the net sum obtained by “applying the relevant tariffs … for the Services, less the allowances and reductions to which the Customer is entitled” (viz. the “commission” and “voids allowance”) (see clause 2.2). The tariffs were “reduced by 5%” (see clause 3.1) and “the balance of the Charges” was “reduced by a further 18%” (see clause 3.2). However the parties may have viewed the “commission”, the reality is that it simply served to reduce the amount that Southwark had to pay. It would be still more anomalous if the “voids allowance” were disregarded since that would mean that “voids” would be ignored when determining the “amount payable” yet still taken into account when considering how many properties the “amount payable” was to be shared between.
In the circumstances, it seems to me that, unless and until the 2000 Agreement was varied by the 2013 Deed, Southwark was charging Miss Jones (and other tenants with unmetered water supplies) more than was permissible under the 2006 Order.
And the conclusion:
i) Unless and until the 2013 Deed took effect, the relationship between Thames Water and Southwark was not one of principal and agent but involved Southwark buying water and sewerage services from Thames Water and re-selling them to its tenants;
ii) As a result, the 2006 Order applied and served to limit what tenants could be charged; and
iii) The amounts that Southwark charged Miss Jones exceeded the “maximum charge” allowed under the 2006 Order.
Oh my. Oh my, oh my.
The first thing is that an appeal is inevitable. The further hearing on the validity of the 2013 deed of amendment can wait. It may only concern a pound or so a week per tenant, but that is 37,000 tenants for Southwark alone. I’d guess that Thames Water may want to intervene in any appeal too, given that their evidence was of similar arrangements with 69 councils and housing associations, covering some 375,000 properties. This is big money. Every one of those councils and housing associations had better be checking their agreements with Thames Water right now…
Second the water rates were levied as rent. In many Southwark rent arrears cases, this will form part of the arrears, in some cases all of the arrears (as housing benefit doesn’t cover the water rates element). So, a prospect for a counterclaim for overpaid/unlawfully levied water charges for at least 2010-2013 (given a 6 years limitation)? Or maybe an argument that the arrears claimed are uncertain? At first glance, this could potentially impact every rent arrears possession case Southwark has going, against tenants charged the water rates. (And of course, there are the other 68 councils and housing associations with so far unexamined agreements).
How much the ‘overcharge’ was is going to have to be worked out. A certain level of administration charge by a reseller is permitted – according to Ofwat £5 per year, per property – but there will be argument about voids and the actual void rate, amongst other things.
Third, although Southwark will obviously not do anything pending an appeal, what will they do if an appeal fails? The immediate conclusion has to be that a repayment of some sums to the affected tenants would be necessary.
(And lastly and parenthetically, how I wish my case on estate heating charges and the Unfair Terms in Consumer Contracts regulations had not been settled)
The picture, by the way, is by Velaquez, the ‘Waterseller of Seville’.