UK: Cost Cutting Cornwall Fails - Local Authority Pushes The Principle Of Pure Ultra Vires To The Limit In An Attempt To Jump Out Of Its Contractual Obligations

Last Updated: 3 January 2013
Article by Peter Levaggi and Alison Crabbe

It is an unattractive feature of public law that allows public bodies to escape contracts with private parties by evoking their own lack of capacity.

However, the recent Court of Appeal case of Charles Terence Estates Limited ("CTE") v Cornwall Council will be welcomed by private businesses dealing with local authorities.

In this ground breaking case, the Court of Appeal has upheld an appeal against the High Court decision that had allowed Cornwall Council to rid itself of what it considered to be bad bargains by evoking its own, or rather its predecessor district authorities (Restormel's and Penwith's) lack of capacity.

Background

Between 2007 and 2008, CTE had granted 30 leases of houses to Cornwall's predecessor authorities to allow the local authorities to house vulnerable homeless people in good quality accommodation and reduce the use of temporary accommodation. This was a unique arrangement designed to assist the local authorities in meeting their statutory duties to house the homeless.

High Court Decision

The High Court reluctantly found that the local authorities had breached their fiduciary duties to their council tax payers by failing to have regard to market rents when negotiating the terms of the leases. The High Court felt that Section 17 of the Housing Act 1985, which confers on local authorities the power to acquire land, should be read as a power to require such land at a reasonable price. The Court felt therefore that Cornwall's singular failure to have regard to market rents meant that Cornwall had lacked capacity when entering into the leases. Accordingly, all 30 leases were void and of no effect. The irony was that the fault was all Cornwall's (in fact the High Court Judge, Sir Ross Cranston, the former attorney general accepted that CTE acted completely in good faith) and the council were in fact seeking to argue that their own bad behaviour should allow them to avoid their own contractual liabilities freely entered into.

Appeal

CTE duly appealed and the issues for the Court of Appeal to determine were:

  • The "threshold" question of whether Cornwall (or its predecessors) had breached their fiduciary duties in the first place.
  • If the authorities had breached their fiduciary duties was that enough to null and void the leases i.e. should the concept of pure ultra vires allow a local authority to be released from its obligations in circumstances where it had the power to enter into a contract but had not used that power in accordance with its fiduciary duties.

Breach of Fiduciary Duty

The High Court had found that Cornwall's purported breach of fiduciary duty resided solely in the local authorities failure to have regard to market rents. The Court of Appeal however found unanimously that Cornwall had not breached its fiduciary duties pointing to the lack of evidence adduced by Cornwall.

The Vice President of the Court of Appeal, Lord Justice Maurice Kay pointed to the obvious difficulties in identifying the particular market that CTE and Cornwall operated within. If the relevant market was one in which local authorities pay private landlords to let their properties to those in housing need, then the Court of Appeal found that Cornwall had failed to adduce any evidence that such a market had developed to offer a comparison. Alternatively, if the market was one in which a private landlord might let his property to unattractive tenants then Court of Appeal found that Cornwall had failed to produce any expert evidence to demonstrate what a market rent would be.

Maurice Kay LJ pointed out that in any event, the reality of this matter was that both parties were striving to produce a novel solution to address the problems of housing homeless people.

The High Court's finding had depended on the duty under Section 17 of the Housing Act 1985 to acquire land being read so that property must be acquired at a "reasonable price". However, the Court of Appeal felt that it was "rarely appropriate to read into a statutory power a limitation defined by something such as a "reasonable price". To do so would be to invite judicialisation of the limits of legal capacity in the sense that capacity might be ascertainable only upon a judicial determination of the reasonableness of a price". Clearly the Court of Appeal was wary about opening the floodgates to further litigation on this point.

Consequences of Breach

The Court of Appeal disagreed with the High Court decision further, finding that even if there had been a breach of fiduciary duty, it would not have lead to the leases in question being void.

The three appeal judges focused on the decision in two cases - Credit Suisse v Allerdale Borough Council and Anisminic Ltd v Foreign Compensation Commission.

In the Credit Suisse a local authority set up an SPV company to develop a swimming pool and timeshare flats and act as a guarantor in respect of the company's borrowing. Sales of the flats were poor and in an attempt to avoid meetings its obligations under the guarantee, the local authority successfully argued that the contract was void. The Council asserted that it never had the power to enter into the guarantee or transaction and accordingly the Council escaped liability for a £6,000,000 guarantee to Credit Suisse. The Court of Appeal agreed with the local authority that it had no capacity to enter into the kind of arrangement that the transaction represented. Two substantive judgments were given in Credit Suisse by Neill LJ and Hobhouse LJ.

Neill LJ believed that there was no distinction in a private law dispute between a decision of a public body which was "narrowly" ultra vires (i.e. lacking capacity) and one which was "widely" ultra vires (i.e. whilst the public body may have capacity, a particular power was exercised for an improper purpose).

However, Hobhouse LJ took a different approach stating that "Private law issues must be decided in accordance with rules of private law. The broader and less rigorous rules of administrative law should not without adjustment be applied to the resolution of private law disputes in civil proceedings... after taking into account the applicable public law, the civil law proceedings have to be decided as a matter of private law. The issue does not become an administrative law issue; administrative law remedies are irrelevant... it remains necessary to ask what amounts to a defence to a private law course of action ...".

In the present case both Maurice Kay LJ and Etherton LJ preferred to the approach of Hobhouse LJ to that of Neill LJ when dealing with public law ultra vires as a defence to a private law claim.

Maurice Kay LJ stated "it would be highly undesirable if, years after time expired for the making of a prompt public law challenge by a person with a sufficient interest, the fact of an historic breach of fiduciary duty should inevitably lead to the defeat of a private law claim brought by a party who acted throughout in good faith".

Nevertheless, Maurice Kay LJ stated that "at some point, it will be desirable for their to be judicial consideration of the territory between the extremes of Credit Suisse and the present case". Cornwall no doubt hope that this will be soon as, despite being refused permission by the Court of Appeal they are currently petitioning the Supreme Court for permission to appeal. We will keep you updated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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