Before: The Hon. Mr. Justice Sullivan
 
 

B E T W E E N

JUDGMENT
 
DATED: 9 February, 1998

Mr. Justice Sullivan:

In 1981 the Government announced that Chatham Naval Dockyard was to close. Closure was completed by 1985 and that contributed to very high unemployment levels in the Medway towns. Regeneration was a priority and English Estates was charged with the task of redeveloping the former dockyard which was renamed Chatham Maritime.

Improved access was vital for the purpose of securing regeneration. So, in January 1986 Kent County Council ("the County") published a feasibility study in to a new road crossing of the River Medway. The crossing was considered in conjunction with two other highway schemes, the Wainscott Bypass, linking into the west and the Gillingham Northern Link to the east. Together, the three schemes became known as the Medway Towns Northern Relief Road.

In addition to assisting regeneration, the relief road would reduce congestion on the existing A2 bridge crossing of the river Medway. The need for the relief road was urgent but in view of its very high cost, involving a major river crossing, it appeared to the county, as highway authority, that there was no realistic prospect of ensuring its construction before the Millennium by conventional means. That is to say, by the County making a bid for Transport Supplementary Grant in its annual TPP.

So the County turned to consider alternative means of financing the most expensive part of the project, the river crossing, with private sector involvement, leaving the connecting highways to the east and the west to be pursued by conventional means.

Although various options were considered, their essential characteristic was that the capital cost of constructing the tunnel would be borne not by the County but by a private sector company which would be repaid by annual instalments over a number of years. The County made it clear that it could not afford to meet the cost of such instalments on its own. It needed the assistance of partners, such as English Estates and the Rochester Bridge Trust (a charitable trust whose objectives are to provide crossings for the River Medway) and the two district councils on either side of the Medway, Rochester and Gillingham.

During consultations these other bodies had made it clear that their preference was for the crossing to be by way of a tunnel, not a bridge. Tunnelling was the more expensive option but since there was no prospect of obtaining an early crossing without the co-operation of these bodies, the tunnel option was the one which was pursued.

Discussions began between the parties as early as November 1987. Rochester indicated at officer level a willingness to consider making a contribution of some £10 million. Having discussed the matter with senior members, Rochester's Chief Executive told the County surveyor in March 1988 that the City Council was fully committed and fully supportive of a tunnel. The City's finance manager was considering a financial package which would comprise a capital sum together with revenue contributions.

Eventually it was agreed that English Estates would contribute the necessary land and £10 million. The County and Rochester Bridge Trust would repay the private sector company by 25 annual instalments. In turn Rochester and Gillingham would contribute to the County's annual instalments in the proportions of 60 to 40. Rochester agreed to pay Kent two-fifths of Kent's contributions up to a maximum of £960,000 at 1988 prices, with provision for that figure to be increased in accordance with an agreed formula to take account of inflation. The net effect was that the cost of the annual instalments would be split 32% to the County, 32% to Rochester, 21% Gillingham and 16% Rochester Bridge Trust.

On 31 March 1989, three agreements were entered into. First, the "Tunnel Agreement" was entered into between the Bridge Trust, the County and English Estates. The district councils were not parties to this agreement which provided, in summary, for the promotion of a parliamentary bill authorising the construction of the tunnel, for the parties to use their best endeavours to secure its construction, operation and maintenance over a 25 year period, for the Bridge Trust to seek invitations to tender for the financing construction, maintenance and operation of the tunnel and, by clause 5, for the costs of financing, constructing and maintaining and operating the tunnel to be paid by the County and the Bridge Trust in 25 annual instalments.

The County's payments were to be "inclusive of any payments made to the County Council by Rochester or Gillingham". In effect, the County would be leasing the tunnel from the private sector company which was to construct it.

Secondly, the "Main Agreement" was entered into between the County and Rochester. This referred to the Tunnel Agreement and recited the County's obligation to make financial contributions towards the cost of financing, constructing, maintaining and operating the tunnel and, it recited the City's agreement to contribute to payments to be made by the County under the Tunnel Agreement.

Clause 1 stated that the agreement was made under s 274 of the Highways Act 1980. Clause 2 required the City to pay the County "two-fifths of the payments made by the County Council pursuant to the provisions of clause 5 of the Tunnel Agreement."

There was a parallel agreement between the County and Gillingham.

Thirdly, there was the "Side Agreement" between the County and Rochester, which is the subject of this litigation and to which I will return in due course.

If matters had stopped at the Tunnel and Main Agreements, there would have been no problem in the circumstances which followed. Rochester undoubtedly had power to enter into the Main Agreement under s 274 of the 1980 Act which provides that:

"A council may contribute towards any expenses incurred or to be incurred by a highway authority if, in the opinion of the council, the expenditure is or will be of benefit to the council's area."

Had, what came to be called the "lease financing scheme" for which provision was made in the Tunnel Agreement, proceeded, it would have been lawful for Rochester to make contributions under the Main Agreement to the Council's expenditure. But the lease financing scheme did not proceed. As early as 1988 doubts had begun to emerge as to whether the lease financing structure would fall foul of the more stringent controls over local authority capital expenditure which it was known were proposed to be introduced in April 1990.

The question was whether the lease finance structure would amount to a credit arrangement and hence required credit approval from the government. These doubts intensified through 1989. Counsel's opinion was taken in 1990. It was equivocal. An approach was made to government for supplementary credit approval.

In May 1991 the Minister made it clear that he would not be prepared to make regulations exempting the proposals from the new controls, and he would not be prepared to issue supplementary credit approval.

The lease financing scheme was dead. But the proposal for a tunnel was not, because that which was least expected in 1989 happened: the Secretary of State invited the County to include the tunnel in its TPP submission. Thereafter, TSG was granted at the end of 1991. In 1992 a new Tunnel Agreement superseded the 1989 Tunnel Agreement.

The tunnel was constructed by the County as a conventional if expensive highway scheme. Half of the net cost after the English Estates capital contribution being met by TSG, the remainder being funded by the County with the assistance of rate, now revenue support grant (RSG). Construction began in May 1992 and the tunnel opened in June 1996 at a total cost of around £18 million.

As I have indicated, had there being no Side Agreement, there would have been no problem. The 1989 Tunnel Agreement having been superseded, the County was under no objection to, and did not, make any payments under it. So there would have been no requirement for Rochester to make its two-fifths contribution to the County's payments under clause 5. One would not expect a district council to make such a contribution to a conventionally funded highway scheme. Gillingham has made no contribution under its parallel Main Agreement.

But the position of Rochester was different because it had entered into the Side Agreement. In brief, the background was that Rochester had substantial capital reserves. From the outset it wished to use those as part of its contribution so as to reduce its future liability to contribute to the annual lease payments. It therefore considered, together with the County, how it could in effect commute part of its obligation to make contributions under the Main Agreement by paying a capital sum at the outset.

It might have been thought, given the breadth of s 274, that there would have been no problem in making part of its contribution in that way, but there were two perceived obstacles to such a straightforward course. First, from the County's point of view it was important that the scheme could still be characterised as one that was being paid for out of revenue. The County must not appear to be incurring capital expenditure on the scheme. That was the essence of the lease finance structure.

Secondly, more importantly, from Rochester's point of view, was its concern that any capital payment should not be caught by the new controls over "forward funding" by local authorities of capital schemes which were due to come into force on 1 April 1990. So what can only be described as a "fiction" was devised, whereby Rochester would make its capital contribution not to the tunnel project but to existing County highway schemes which were actually under construction in the City. Since the schemes were under construction, there could be no question of forward funding. In turn the County would not have to borrow to spend on those existing highway schemes and so it could afford to apply more of its funds to the tunnel, thereby reducing the need for future annual contributions from Rochester. Hence the form of the Side Agreement, which was as follows:

"Further to all previous discussions and correspondence the Kent County Council and Rochester upon Medway City Council will enter into the following agreement.

1. Rochester will make capital payments towards highway schemes within the City Council's area which are part of Kent County Council's existing capital programme and are detailed at Schedule 1. The capital payments will total £1,375,000 and £619,000 and will be payable to the Kent County Council on 31 March 1989 and 30 March 1990 respectively.

2. The capital contributions will not affect the City Council's prescribed capital financing statement and the Kent County Council will there-fore transfer to the City Council a compensating prescribed allocation.

3. The City Council will make these contributions as a gesture of appreciation for the significant contribution of the Kent County Council, towards the conception of the Medway Tunnel.

4. The Kent County Council being most appreciative of the Rochester upon Medway City Council's capital contribution will increase its annual contribution (and reduce the City Council's share by an identical amount) of the revenue payments to be made towards the annual financing of the Medway Tunnel. The increased annual revenue contribution to be paid by Kent County Council is detailed at Schedule 2 (and reflects an annual investment factor of 11.67%).

5. In the event of the Tunnel Project not proceeding or being completed, the County Council will reimburse to the City Council the capital contributions referred to at Clause 1 earlier. The reimbursement will also include accrued interest geared to the average seven day rate for the period of the advance(s).

6. The City Council confirm that a Fund has been earmarked within its Financial Reserves to meet its element of the revenue financing costs of the Medway Tunnel. This Fund has been set up by way of existing revenue resources of the City Council.

This agreement is a side letter to the main legal agreement between Rochester City Council and Kent County Council and has taken effect on March 1989 and has been entered into by..."

It was signed by the Finance Director of the County and the City's Finance Manager. Schedule 1 listed the highway schemes to the total value of £1.375 million in 1988/89 and £619,000 in 1989/90. I have described the Side Agreement as a fiction because all of the schemes were already under construction. TSG had been awarded for all but one of them and in some cases stage payments had already been made. The schemes would have proceeded whether or not there had been any contribution by Rochester. What had happened was that Rochester had calculated how much capital contribution it could afford (£2 million). The County had then supplied a list of existing highway schemes in the City up to approximately that figure. In the event, it amounted to all of the County's then highway schemes in the City.

It is common ground that the City Council members never considered the merits of these schemes in the context of s 274. The relevant highways were not even identified in any report which officers made to them. The two capital contributions, totalling nearly £2 million, were paid by Rochester to the County on 31 March 1989 and 27 March 1990 respectively. The County spent the

money on those highway schemes listed in Sch 1. It also transferred capital expenditure allocations to Rochester under clause 2 of the Side Agreement. What it did not do was to increase its annual contribution of revenue payments to be made towards the annual financing of the Medway Tunnel (see clause 4 of the Side Agreement) because, with the demise of the 1989 Tunnel Agreement, there were no revenue payments to be made.

Once it was clear that the lease finance initiative could not be pursued, there were negotiations between the County and the district councils as to what contribution the latter might be able to make under the new TSG funded regime. Although Rochester showed a willingness to continue to make some form of contribution, those negotiations ultimately came to nothing.

The 1992 Tunnel Agreement dealt with the respective liabilities of the County, the Bridge Trust, and English Estates under the TSG funded regime, without reference to any obligation on the part of the district councils.

Notwithstanding the fact that the two payments totalling some £2 million were regarded by both Rochester and the County as a commuted sum in lieu of Rochester's obligations to make contributions under the Main Agreement towards the County's annual payments under the superseded 1989 Tunnel Agreement, the County has refused to return the money. I have no hesitation in saying at the outset before any legal analysis that I find that a surprising position for one local authority to adopt when it has received money from another local authority in circumstances such as those I have described above.

Mr Drabble QC, for the City council, seeks repayment of the two advance capital payments on three grounds. First, as a matter of construction, he says that the "tunnel project" referred to in clause 5 of the Side Agreement means not simply a tunnel however financed, but the project for which provision is made in the Tunnel and Main agreements, including the arrangements for financing contained in those agreements. That project has not proceeded, so the City is entitled to the return of its money under clause 5 ("the construction point").

Secondly, in the alternative, if the matter is not covered by clause 5, he says that since the obligations of the parties under the Tunnel and Main agreements became incapable of being fulfilled when the government refused supplementary credit approval in May 1991 and the parties to those agreements decided to proceed instead under the TSG financed route, the Side Agreement has been frustrated ("the frustration point").

Thirdly, the Side Agreement and the payments made under it were ultra vires because they were an unlawful exercise of the powers conferred upon the City by s 274 ("the ultra vires point").

Logically it is sensible to consider the ultra vires point first, since, if the Side Agreement is void, questions of its construction and frustration do not arise.

I have already set out the terms of s 274 and indicated that the Main Agreement was an example of a lawful use of the powers conferred by that section on the City council. The City was satisfied that the County's proposed expenditure on the tunnel would be of benefit to the City's area. Having formed that view, it then had a discretion as to whether to contribute towards the County's expenses under the Tunnel Agreement. If the County had been able and willing to proceed with the lease financing proposals without any contribution from the City, because, for example, of a much more substantial contribution from English Estates or the Bridge Trust, the City councillors, mindful of their fiduciary duties to their community charge payers/council tax payers, could not reasonably have decided to contribute under s 274. But, as Mr Farmer, the Projects and Procurement Manager for the County, told me in evidence, the County could not and would not have entered into the 1989 Tunnel Agreement without the City and indeed Gillingham agreeing to contribute towards its expenses. As he put it, "Everyone was pushed to the limit of their funding ability".

Hence the City's decision to contribute to the County's expenses under the lease finance proposals contained in the Tunnel Agreement was lawful, as being in accordance with its fiduciary duty as well as within the terms of s 274.

Against that background, I turn to the Side Agreement. I have already set out the terms of clause 1. That says in terms that the capital payments are to be made, not to the tunnel, but to the existing highway schemes listed in Sch 1 to the agreement. Clause 3 states that "these contributions", that is to say the capital payments to existing highways schemes, will be made "as a gesture of appreciation" towards the County's significant contribution to the conception of the tunnel.

As I have indicated, it is common ground that the City councillors did not consider even the identity of the existing highway schemes, let alone whether the County's expenditure on them would be of benefit to the City. Even if they had considered those matters, they could not reasonably have concluded that a contribution from the City was justified because the schemes were proceeding in the relevant years in any event.

A contribution in such circumstances would simply have been a waste of council taxpayer's money. It seems to me, therefore, that if the capital payments were capital payments to existing highway schemes, and not to the tunnel, they were ultra vires.

Miss Otton-Goulder for the County Council submits the payments were not ultra vires. She says that authority for the payments is not the Side Agreement but s 274 itself. Section 274 permits "forward funding" of expenses "to be incurred" by a highway authority.

Thus the City was entitled to make advance capital payments towards the County's future expenses in respect of the tunnel. That is what the City did. Since local government finance is, as she put it, organised globally with receipts being paid into and expenses being paid out of a single fund, rather than a series of separate funds earmarked for particular road schemes, the City could not have expected its capital contributions to be paid into a specific tunnel fund. The contributions would be paid into the "highway pot" out of which the County would fund the tunnel as well as the existing schemes.

Miss Otton-Goulder says that the expenditure referred to in s 274 refers to the City's expenditure not the County's expenditure. Thus, all the City had to be satisfied of was that its expenditure would be of benefit to its area. Section 274 authorised the contribution. It is not thereafter concerned with how the County spent the contribution, although she accepts that the County would have to spend the contribution on highway schemes rather than, for example, the provision of schools.

Here, she says, the City's contribution served a dual function. It is not simply that it enabled the County to spend money on its existing highway schemes. Because the County was able to do that, it did not have to borrow for those schemes and thus was able to devote more funds to the tunnel. The City Council members wished to make a contribution to the expenses of the tunnel and, because of the dual function of that contribution, they achieved that objective, which was intra vires.

I realise that I may not have done justice to the County's lengthy and detailed submissions on the ultra vires issue, but I confess that they seem to me to fly in the face of the express terms of the Side Agreement. I accept that s 274 enables a district council to make a payment to a County Council without there being the need for any agreement between the two. However, in most cases a prudent district council will insist on some form of agreement with the County in order to safeguard its council tax payers' money. Here the City's Policy and Resources Committee resolved to approve "the terms negotiated by the City Finance Manager with the County Council" for capital payments to the latter. The terms negotiated by the City Finance Manager were those embodied in the Side Agreement and were described in the report to the committee as involving capital contributions "towards projects in the County's capital programme for road schemes in the City area".

Members were not recommended to and did not authorise capital payments to the tunnel because of the City Finance Manager's concerns in respect of forward funding which I have mentioned earlier.

Miss Otton-Goulder says that those concerns were not well founded since s 274 permitted "forward funding" of road schemes. That is beside the point since that is not what the councillors actually authorised or what the Side Agreement actually provided.

Moreover, I consider that such "forward funding" of the tunnel would not have been within the terms of the revised block borrowing approval and the revised general consent to the use of capital money which had come into effect in February 1989.

Since the question is a hypothetical one, it is unnecessary to set out the terms of the approval and consent. In brief, the City could have applied its capital funds towards any purpose for which it could have borrowed. If it wished to borrow for the purpose of defraying expenditure on "construction ... of ... structures" (to be distinguished from the repair and maintenance of highways) the construction works had to be carried out before 30 April 1989, "the qualifying date".

I do not accept Miss Otton-Goulder's submission that para 1(f) of the block borrowing approval permitted the City to defray the County's expenses in respect of work to be carried out after the "qualifying date". The qualifying date is part and parcel, and a very important part, of "the purposes" for which borrowing, and hence the application of capital moneys, was permitted.

So the City was right to conclude that it could not lawfully make capital contributions to the tunnel. Whether right or wrong, it did not in fact make capital contributions to the tunnel. It made them to existing highway schemes and that, for the reasons that I have explained, was ultra vires. The Side Agreement is therefore to be regarded as void ab initio - see per Neil LJ at pages 343A-344C of Credit Suisse v. Allerdale Borough Council [1997] QB 306.

In the light of that decision, it does not matter for present purposes whether there was a lack of capacity on the part of the City Council to enter into the Side Agreement or whether it acted in abuse of power in so doing. The County wishes to reserve its position as to whether the ultra vires act may be different in the latter case in the event that this matter proceeds further.

In my view, the "expenditure" in s 274 refers to the County's expenditure not to the City's contribution towards that expenditure. The City did not have the capacity to enter into the Side Agreement to make a contribution to the County's existing road schemes because it had not addressed the prior question whether the County's expenditure on those schemes would be of benefit to its area. It could not address that prior question since it did not know what the schemes were. It follows that the "construction issue" and the "frustration issue" do not arise and the only remaining question is restitution.

Before dealing with that, I will express my views briefly on those other two issues. First, the "construction issue". Does clause 5 of the Side Agreement mean "a tunnel" howsoever financed, or does it mean the tunnel project for which provision, including provision for financing, is made in the Main and Tunnel Agreements?

If it is the former, then the "tunnel project" has proceeded, the tunnel is open and the capital contributions would not be repayable under clause 5. If it is the latter, whilst a tunnel has been built, it has been financed through the TSG route, that has superseded the tunnel project from which provision was made in the Main and Tunnel Agreement which has not proceeded, and the capital contributions would be repayable.

What would the expression "the tunnel project" have conveyed to parties on 31 March 1989 in the light of the factual back-ground which I have summarised at the outset of this judgment? See the question posed by Lord Hoffman at page 114H of Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 All ER 98.

In my view there are three points of particular significance in the factual matrix here. First, the Side Agreement is merely a side letter to the Main Agreement, which is in turn subsidiary to the Tunnel Agreement, in the sense that it makes provision for contributions to payments to be made under the Tunnel Agreement. The Side Agreement has no independent existence. If anyone was asked "What tunnel project are you referring to?", the natural answer would be, "The project described in the Tunnel Agreement."

Second, whilst the object of the Tunnel Agreement was, of course, to secure the construction of a tunnel crossing, because the lease financing proposals were innovative and unorthodox, they were at the very core of the Tunnel Agreement and hence of the tunnel project as conceived at that time.

Thirdly, the parties to the Main and Side Agreements were not two commercial organisations dealing with each other at arms length, each concerned to maximise its own commercial advantage and each free to negotiate whatever deal it wished. They were two local authorities trying to co-operate so as to secure the provision of a project which both believed to be in the public interest.

Given its fiduciary duty to its council charge payers/tax payers, the City could not lawfully make a contribution to any proposal for a tunnel regardless of how it was to be financed. Its contribution to the tunnel project described in the Tunnel Agreement was lawful because, without it, that tunnel project could not proceed. If some other tunnel project became possible because of an injection of public or private capital, then the City would have had to reconsider whether its contribution could be justified as a prudent use of its council tax payers' money. As a fellow local authority, the County would have been well aware of this constraint upon the City.

Turning to the actual words used, clause 5 does not say "in the event of a tunnel not being constructed". Miss Otton-Goulder does not suggest that the words "the tunnel project" are not wide enough to embrace the financing arrangements for as well as the construction of the tunnel.

Against the factual background I have described, I can see no reason why "the tunnel project" in clause 5 should not mean the project for which provision was made in the Main and Tunnel Agreements, including, in particular, the innovative financing arrangements which necessitated those agreements and the City's involvement in the first place. That tunnel project did not proceed. If the Side Agreement had been intra vires, the contributions would, in my view, have been returnable under clause 5. Frustration does not, therefore, arise whether the Side Agreement is intra vires or ultra vires.

Since anything I say on this topic will be obiter, I do not intend to rehearse, much less to add to, the numerous authorities cited to me in respect of the frustration issue. One additional reason for not doing so is that many of the decisions turn on their own particular facts and the facts of this case are very unusual.

I have already made the point that the Side Agreement is just that, it has no independent existence.

Miss Otton-Goulder did not accept that the Main Agreement could properly be said to have been frustrated by the events of 1991/1992 because it was a deed under seal in respect of voluntary contributions from the City for which the County gave no consideration.

Whatever phraseology is used, it is clear that both the Tunnel and the Main agreements were a dead letter, unenforced and, in practical terms, unenforceable, after the Government's decision in May 1991. They were described as "void" in a County Council note in July 1991.

It is difficult to see why the Side Agreement was not frustrated in those circumstances. Because of the failure of the Main Agreement, the County was not able to do that which it had promised in clause 4 of the Side Agreement. It is clear that the annual contributions referred to in clause 4 are the annual contributions which the County was to have paid under the 1989 Tunnel Agreement. This is not a case where, as a result of changed circumstances, performance of a contract has unexpectedly become more difficult or expensive for one of the parties. The County cannot perform its part at all. Insofar as the parties' common object was lawful on the City's part, it was not to make a contribution to any tunnel project, howsoever financed. That would have been unlawful, given its fiduciary duty. It was to contribute to the County's expenses under the innovative lease financing arrangements in the Tunnel Agreement. That common objective was frustrated by the Government's decision in May 1991. It is true that the County transferred a "compensating prescribed capital allocation" to the City under clause 2, but that simply restored the status quo ante. The City's prescribed capital allocation was maintained at its former level, and the County did not have to incur capital expenditure on the existing highway schemes.

I should add, before turning to restitution, that the County Council argued that the City was estopped from contending that the words "the tunnel project" had the meaning for which Mr Drabble contended and which I have accepted. I can find no basis for such an estoppel on the facts. True it is that the County transferred the compensatory capital allowances, but the effect of that was simply to put both parties in the same position in respect of capital allowances that they had enjoyed prior to the Side Agreement. The County did, of course, bear a substantial part of the cost of constructing the tunnel with the assistance of TSG, but there no evidence that, in agreeing to proceed with a tunnel funded as a conventional highway scheme, the County relied on any contribution, much less a contribution of £2 million, from the City Council.

That much is plain from a report of the Director of Highways and Transportation to the relevant sub-committee on 9 March 1992, seeking authority to enter into the 1992 Tunnel Agreement and to construct the tunnel with the assistance of TSG. That report says, under the subheading, "District Councils":

"With the public sector involvement in the project now achieved through TSG, there would be no advantage to [the County] for Rochester and Gillingham Councils to contribute in the manner originally envisaged with lease finance. There does, however, remain the possibility of both Councils assisting the Bridge Trust to meet the preparation and maintenance/operating costs of the tunnel and discussions are in hand."

Those discussions came to nothing, but it is clear that the County did not rely on a £2 million contribution from the City in deciding to go down the TSG route. None of the County's witnesses were able to explain precisely when it was thereafter that the County had decided that it was entitled to retain the City's money.

Against that background, I turn to consider the question of restitution, the Side Agreement being ultra vires. Prima facie the City is entitled to the return of its capital contributions as money had and received, because, there having been no contract, there was an absence of consideration: see Westdeutsche Landesbank Girozentrale v. Islington [1996] AC 669 per Lord Goff at page 683.

The County mounted a lengthy argument to the effect that it had not been unjustly enriched at the City's expense. In my view the County was enriched to the tune of £2 million, which was made over by the City. That £2 million was treated by both parties as a commuted sum towards expenses which the County was going to, but did not, incur under the 1989 Tunnel Agreement. Does the fact that the County incurred other expenses on constructing the tunnel under the 1992 agreement mean that its enrichment at the City's expense, was not unjust?

The real burden of the County's case was that, as eventually constructed, the tunnel cost around £80 million. TSG was obtained in the sum of £24.5 million. After making allowances from contributions from English Estates and the Bridge Trust, the County had to borrow nearly £33.25 million to build the tunnel. On the assumption that those borrowings will be paid off over 25 years, it will have incurred a further liability to interest totalling nearly £39 million.

The Department of Transport published a brief guide to the TSG system. This states that 50% of a road scheme's cost, which is not covered by TSG, will be taken into consideration in calculating the local authority's standard spending assessment (SSA) for RSG purposes "So that even that part of an authority's expend which is not funded by TSG receives government support via the RSG system".

Circular 11/90 explained that, in broad terms, for each £1 of extra credit approval the resulting increase in the local authority's SSA will mean that the charge payers are protected by a compensating increase in RSG.

The County dispute that this is how the system works in practice. Mr Martin, who was the County's Finance Director until last year, and who has very considerable experience of the RSG system, gave evidence on its behalf. For a variety of reasons, he explained, around 25% of the County's borrowing costs would not be met by the increase in RSG.

These complaints as to the operation of RSG miss the point when one is considering what is just or unjust as between the County and the City. The City were never asked to, and never agreed to, contribute to the County's debt charges incurred in funding the capital cost of constructing the tunnel. There is no decision of the County to seek a contribution from the City towards those charges. That is not surprising. One would not expect a district council to contribute to a highway authority's debt charges and there is no other scheme in the County where the County Council is seeking such a contribution from a district council.

The argument that TSG and RSG combined lead to a shortfall which has to be met by the highway authority is equally applicable to any conventionally funded highway scheme. If there is any unfairness in the way the system operates, that should be taken up as between the County Council, as highway authority, and the Department of Transport. The County has indeed done this. It has argued in the annual RSG negotiations that its SSA does not adequately reflect the extent of its debt charges in respect of the tunnel and other major road schemes.

Thus far, the government has been unmoved. I do not accept that the fact that the RSG system is not operating as the County would like it to is any reason for it to retain the City's £2 million. As I have indicated, the County did not rely on the City's £2 million when it decided to pursue the tunnel via the TSG financing route. Had it done so, a change of position defence might have arisen: see Lipkin Gorman v. Karpnale Ltd [1991] 2 AC 548.

The County says that it spent £2 million on the existing schemes. So it did. But at that stage the necessary private Act of Parliament had not been obtained and there were many other uncertainties as to whether it would be possible to construct a tunnel at all.

The County's management style was said to have been optimistic, but, however clause 5 of the Side Agreement is interpreted, it must have been clear at the time the £2 million was being expended on existing highways schemes that it might well have to be reimbursed under clause 5.

Thereafter, the County spent large sums of money on the tunnel. This may well make it more difficult for the County to return the £2 million. But its decision to proceed with construction in 1992 did not rely on any contribution from the City. At best there was a hope that the district councils might contribute to maintenance. In the event, even that was not necessary because the Bridge Trust's contribution to maintenance has been more than sufficient, so that the County has not had to incur expenditure on the tunnel under that head.

For all these reasons, I can see no justification for the County's retention of the money and the claim for restitution must succeed in full.

It was agreed that the claim for interest should be adjourned until after I had delivered this judgment. I would hope that that question can now be resolved between the parties by agreement. If that is not possible, then I will hear submissions about that matter at a date which is convenient to the parties.