Schedule 8 of a Track Access Contract is “logical, well- researched, carefully constructed, and well supported”. Those are the words of Mr Justice Akenhead in Network Rail v Handy and others meaning drivers (namely insurers) of road vehicles are liable for Network Rail’s TAC Schedule 8 loss if they negligently damage rail track or other installations and cause consequential TOC delays.
According to Network Rail, in 2013/14 road vehicles struck overhead railway bridges on 1,708 occasions. A further 101 strikes occurred on road bridges crossing railway lines.
Bridge strikes and line incursions (where a vehicle is driven onto or over lines and damages the track and/or collides with a train) have obvious potential consequences, including damaged and destroyed tracks, structures, and vehicles and the serious injury or death of a train or vehicle’s driver and/or passengers. The industry is alert to safety risks in this respect and generally takes all necessary steps to minimise them.
The secondary consequences of bridge strikes and line incursions are that the track is temporarily unusable and later trains on the same line will be delayed, causing knock- on effects around the rail network. This causes delay to passengers and financial losses to operators.
In the Track Access Contracts (TAC) between Network Rail and TOCs, one party will have to make payments to compensate for any delay. Network Rail is generally liable for any delay arising from the track not being available through no fault of the relevant TOC. The amount it pays to the TOC is calculated in accordance with Schedule 8 of the relevant TAC.
Network Rail is therefore on the hook to TOCs for delay caused by negligent drivers who hit bridges, level crossing incidents and other road related interference with the rail network. The recoverability from negligent drivers of the amount NR pays to the affected TOCs under Schedule 8 was the subject of a landmark ruling in 2011 (Conarken) and has recently been the subject of further Court scrutiny and judgment.
Conarken v Network Rail
The Court of Appeal decision in Conarken Group Ltd v Network Rail Infrastructure in 2011 stated that where a third party had negligently damaged the track – such as a car or lorry striking a railway bridge – and caused a delay on the rail network, Network Rail’s liability to TOCs under the TAC (Schedule 8) was recoverable as damages from the negligent driver (unless there are exceptional or unreasonable circumstances).
All drivers must carry insurance, which at a minimum must include cover for damage to a third party’s property, Conarken therefore ultimately makes a negligent driver’s insurer liable to pick up Network Rail’s Schedule 8 payments to TOCs under the TAC. These can in some circumstances be very large, if disruption across the network is significant (e.g. when a bridge supporting a main inter-city line is struck). Insurers therefore are concerned about the potential financial impacts of such incidents.
The same insurer involved in Conarken was involved in the latest case of Network Rail v Handy and others and challenged the Schedule 8 TOC payments in a slightly different way.
Network Rail v Handy and others
Network Rail claimed against five insured drivers, including Mr Handy, who had been involved in bridge strikes or line incursions. Network Rail claimed a cumulative total of approximately £370,000 in damages it had paid to TOCs under the relevant TACs.
The Defendants (and their insurer) argued that the mechanism in Schedule 8 that calculates the payments made to TOCs by NR does not accurately, reasonably or genuinely estimate or reflect the actual lost revenue suffered by TOCs caused by an individual incident.
The Defendants claimed that payment by them of damages under a TAC constituted “unjustified subsidies” as damages due were allegedly much greater than the true loss suffered by the rail industry when a road/rail incident occurs. The Court was consequently asked to look at the detail of the Schedule 8 mechanism for calculating TOC loss to assess whether it appropriately quantified loss actually suffered.
Schedule 8 of a TAC is a relatively involved series of formulae used to calculate TOC loss in certain situations. In essence it seeks to ascribe a financial value to each minute of lateness or delay to represent current and future losses of revenue to the relevant operator.
One part of Schedule 8 loss that was a key issue in Handy is the calculation of the Marginal Revenue Effect (MRE) – the estimated effect on a TOC’s revenue of one minute of average lateness. It is a method of estimating future loss.
MRE factors in the likelihood that a passenger who is delayed by a number of minutes will cease to use the train service. This is partially a function of the scale of the delay – a passenger kept waiting for 30 minutes is less likely to use the train again than one delayed by five minutes.
MRE also accounts for passengers’ travel patterns. Not all passengers use the train every day. Some will only travel a few times a year. The loss to a TOC from a delay may only be realised several months afterwards, when a passenger who would have taken the train instead decides to hire a car, or fly. These impacts are largely derived from the Passenger Demand Forecasting Handbook (PDFH), an industry document which has been developed over time to represent econometric impacts of delay and lateness.
The Defendants claimed that the Schedule 8 formulae substantially and unreasonably exaggerate MRE. They primarily argued that Schedule 8 damages are unreasonable in three ways:
- MRE is exaggerated through the use of unrealistic lateness multipliers;
- Schedule 8 is not appropriate to be used in relation to single incidents; and
- MRE is exaggerated because road on rail incidents are very infrequent in passenger experience.
After detailed analysis of Schedule 8 and detailed evidence, the Court disagreed and found in favour of Network Rail on all the above points. In summary, the Court found that the formulae in Schedule 8 are logical, well-researched, and carefully constructed with reference to the PDFH. The Court said that Schedule 8 reasonably estimates revenues likely to be lost by a TOC as a result of an individual incident of disruption to the rail network. The Court stated that the claimed losses were at a “reasonable and realistic level”.
It followed that Network Rail could recover contractual damages paid out under Schedule 8 of a TAC from a driver whose negligence caused a delay to the rail network.
In Handy, the Defendants conceded that fouling of railway lines constituted sufficient damage to the track for Network Rail to recover damages (the issue was around the reasonableness of those damages and in particular Schedule 8). However, in an attempt to pre-empt a further test case, the Court considered whether a defendant could be liable for delay payments caused purely by trespass, rather than by fouling or damage to the railway.
The Court commented that Schedule 8 payments can be recovered for a delay caused by trespass alone.
Conarken and Handy determine that Network Rail can recover losses under Schedule 8 TACs from negligent drivers and Schedule 8 itself has now received the Court’s seal of approval. The “exceptional circumstances” caveat from the Court of Appeal in Conarken still applies, so a Defendant may still be able to argue in extreme cases that Schedule 8 has over- compensated TOCs (the over-compensation would probably need to be very extreme given this judgment).
However, the Court appears to make it quite clear that it does not wish to see such a detailed examination of this issue again and warns against further test cases. The law in this area is therefore relatively settled for now providing some welcome clarity for the rail industry on the recoverability of Schedule 8 TOC losses.