ABDUL MAJID & SON LTD FOR JUDICIAL REVIEW [2023] ScotCS CSOH

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

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

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:

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:

"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,"

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

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.

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

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

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

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

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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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> 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 GWD 25-215, [2023] ScotCS CSOH_41, 2023 SLT 740

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