Stopped in its tracks: the Environment Agency's application under section 44 of the Arbitration Act 1996 to preserve 'assets' from HS2 earthworks is derailed by the TCC

On 21 June 2024, the Technology and Construction Court (“TCC”) dismissed an application for an interim injunction under section 44(3) of the Arbitration Act 1996 (the "Arbitration Act") made by the Environment Agency (the “EA”) in its dispute with High Speed Two (HS2) Limited ("HS2"), intended to preserve the agency's 'interests' in groundwater by preventing earthworks proposed by HS2. The case serves as a reminder that an order pursuant to section 44(3) of the Arbitration Act will only be made if it is necessary for the preservation of evidence or assets and clarifies that “assets” may be interpreted broadly. 

Background

The dispute arose in relation to the High Speed Rail (London – West Midlands) Act 2017 (the "HS2 Act"), which authorises the construction of 'Phase One' of the HS2 rail network. The HS2 Act additionally, at Schedule 33, contains provisions designed to protect "the interests of certain persons who may be affected by other provisions of the Act" in relation to water abstraction (section 48, HS2 Act). 

This protection applies to the EA; its interests are established in the Water Environment (Water Framework Directive) (England and Wales) Regulations 2017/407 ("WFD Regulations") and section 6(2) of the Environment Act 1995, under which the agency can decide whether to grant, vary, revoke, or impose conditions on a licence for water abstraction. Practically, this means that the EA must consent to any work undertaken by HS2 which is "likely" to affect either river water, surface water or groundwater, or the conservation, distribution or use of water resources.

Any dispute arising between HS2 and the EA in connection with the HS2 Act is to be determined by arbitration.

HS2 planned to carry out earthworks at two sites in Warwickshire, both of which were located within "poor" water bodies (as designated by the EA). The work was to be done in two phases: a "dry dig" followed by a "wet dig". HS2’s view was that, whilst the wet dig would require the EA’s consent, the dry dig did not trigger the consent requirement under the HS2 Act as it would not affect the groundwater at the sites. 

The EA disagreed and considered that: (1) the dry dig and the wet dig works could not be separated; (2) the works would necessitate permanent abstraction of the groundwater (i.e. taking water from a surface or underground source) at these sites; and (3) HS2 therefore required consent to carry out the entirety of the works under the HS2 Act.

On 21 May 2024, the EA applied for an interim injunction under section 44(3) of the Arbitration Act to prevent the dry dig until the earlier of the granting of the agency's consent to the works or the date of determination of the arbitration (which was commenced on 6 June 2024).

Section 44(3) of the Arbitration Act

Section 44 of the Arbitration Act outlines the powers of the court to make orders in relation to specified matters in support of arbitral proceedings. These matters include (amongst others):  

• Granting an interim injunction (section 44(2)); and 
  
• In urgent cases, making such orders as the court thinks necessary for the purpose of preserving evidence or assets (section 44(3)). 

The interpretation of "assets"

The EA argued that its "asset" was "the natural world, and particularly the at-risk water" or, in the alternative, that it should be entitled to seek to prevent its interests under the WFD Regulations from being adversely affected. Whilst the Court rejected the first argument, finding that the definition of an "asset" was not wide enough to include the natural world or the groundwater, the judgment contains a detailed analysis of the circumstances under which an "interest" may be an "asset" for the purposes of section 44(3) of the Arbitration Act.

Joanna Smith J referred to the decision in Cetelem SA v Roust Holdings Ltd [2005] EWCA Civ 618, noting that it was clear from the judgment in this case that the Court of Appeal considered the meaning of an "asset" to be broad. As set out in Cetelem, an "asset" could comprise choses in action, contractual rights, or assets which do not belong to a defendant; Clarke LJ in Cetelem had further considered that there was no good reason to interpret the meaning of "asset" narrowly, or to apply the same frame of reference as in the case of a freezing order.

Following Cetelem, Joanna Smith J held that, given: (1) the EA’s statutory environmental duties and the applicable regime under the HS2 Act; and (2) the inclusion of the arbitral dispute resolution mechanism in the HS2 Act, it was "difficult to see why the court's powers under the 1996 Act should not be wide enough to include an order designed to preserve, for example, the [EA’s] interests under Schedule 33 and/or the WFD Regulations".

On this basis, the Court found that it was possible to characterise the application as seeking an order for the preservation of assets under Section 44(3) of the Arbitration Act.

Urgency 

In deciding whether the application met the test of urgency under s.44 (3), Joanna Smith J held that, despite detailed negotiations which took place between the parties prior to the commencement of the arbitration, the EA’s decision to 'sit tight' during the negotiations in hopes of an escalation of the dispute being avoided was justified. The Court found that the agency had acted swiftly to apply for the injunction once it became clear that escalation was inevitable and that the case was “one of urgency” on the basis that the works that the EA sought to stop had already commenced. 

That said, the Court confirmed that the question of urgency is to be understood in the context of the order being sought and that the Court must also be satisfied that the order is “necessary for the purpose of preserving…assets”. 

Ultimately, the Court concluded that it was not 'urgent' that an order was needed to preserve the EA's asset. The EA’s primary focus had been on the combined works that would be undertaken (i.e. the dry dig and wet dig together), as opposed to the phased works that HS2 had proposed to undertake (along with various control measures in place to identify any groundwater, at which point works would cease). 

Was the application “necessary” to preserve the asset?

The final aspect of section 44(3) which fell to be considered by the Court was whether the interim injunction was "necessary" to preserve the EA’s interests. Having considered the evidence, it was held that it was not necessary to grant injunctive relief. 

In particular, the Court balanced expert evidence submitted by both parties, including references made by the EA’s expert which did not clearly explain how the dry dig was "likely" to affect the groundwater, nor did it state that it was "necessary" to put a stop to the dry dig to preserve the agency's assets. The Court found that the dry dig would not, on the evidence, result in permanent abstraction of the groundwater at the sites. Further, the Court was persuaded by HS2's evidence regarding the controls which had been put in place at the dig sites to protect the groundwater.

Key takeaways

By reference to Cetelem, this case serves as a useful reminder of the broad rights and properties which might be considered "assets" for the purposes of section 44(3) of the Arbitration Act. Here the Court held that the ‘interests’ of the EA as set in statute and regulation constituted an ‘asset’ but the definition was not wide enough to include the ‘natural world’ or the groundwater. 

However, whether or not something is an asset is only part of the test under section 44(3), and parties to arbitral proceedings seeking preservation of assets will still need to overcome the "jurisdictional hurdle" by demonstrating that such preservation is both urgent and necessary. Importantly, urgency is to be assessed within the context of the order being sought.