Successful A1P1 claims by photovoltaics

13 July 2014 by David Hart KC

Breyer Group plc and others v Department of Energy and Climate Change [2014] EWHC 2257 (QB) – Coulson J read judgment 

This is an important judgment on governmental liability for a rather shabby retrospective change of the rules about subsidies for photovoltaic schemes. The Court of Appeal had decided in 2012 that the changes were unlawful: see judgment  and my post here.  The question in Breyer was whether businesses could obtain damages under A1P1 arising out of the Secretary of State’s decision. Though the judgment proceeds on a number of assumed facts, some critical findings of law were in favour of the businesses.

Background

In October 2011, the DECC Minister (Chris Huhne, before some local difficulties with penalty points) proposed in a consultation to reduce the subsidies for photovoltaic schemes which became eligible after 12 December 2011. This modification was to cut in 1 April 2012. The original scheme paid participants 43.3p per kilowatt hour for 25 years. The proposed revised scheme for new joiners would pay them that rate until April 2012, but thereafter 21p per kilowatt hour for the rest of the 25 years.

The Court of Appeal decided that  section 41 of the Energy Act 2008 did not allow such modification. Questions of retrospectivity and retroactivity arose, as discussed in my previous post here.

But, as the judge in this case of Breyer pointed out, this was not the position faced by the claimants in that case. They had not got as far as becoming eligible for the subsidies. The change in the cut-off dates from April 2012 to December 2011 had made hundreds, if not thousands, of projects unviable because they could not be completed in time. These projects were at various stages, with some subject to signed contracts and others with an expectation that such contracts would arise.

Possessions?

This was the first problem facing the judge. Were all these various arrangements and expectations “possessions” within the meaning of A1P1? The judge found no difficulty with signed contracts. Applying the test in the case law, these were possessions because they were tangible,they were assignable and on their face had a present economic value: [51]. The SoS’s argument was that you had to examine each contract to decide whether it was enforceable either by requiring performance or the payment of damages, before you could decide whether it was an asset. The judge rejected this; any contract is an asset, whatever its terms about termination.

On the contrary, unsigned contracts (described as work opportunities or prospective contracts) were not possessions. It did not matter that a claimant was a preferred bidder or had a reasonable prospect of acquiring a contract.

A conceptually far more difficult problem was posed by the distinction in Strasbourg case law between simple loss of future income (not an A1P1 possession by itself) and marketable goodwill (a possession). A good example of the former was presented by the Malik case (both domestically – here – and Strasbourg – here); the kind of goodwill which is based upon a doctor’s reputation was not a possession because it could not be sold.

The judge drew these fine distinctions together at [75]

(a) Loss of future income is not a possession protected by A1P1;

(b) Loss of marketable goodwill may be a possession protected by A1P1;

(c) There are a number of factors which may point towards the loss being goodwill rather than the capacity to earn profits in the future. One of those will be marketability. Another will be whether or not the accounts and arrangements of the claimant are organised in such a way as to allow for future cash flows to be capitalised.

(d) In addition, the reason why goodwill may be an asset, and therefore a possession under A1P1, is because it is something which has been built up in the past and has a present-day value, as distinct from something which is only referable to events that may or may not happen in the future.

(e) Thus, if there is interference which causes a loss of marketable goodwill at the time of the interference, and if that can be capitalised, then it is prima facie protected by A1P1. If, on the other hand, the interference causes only a potential loss of goodwill for the future, then it is a claim for loss of future profit and is not recoverable.

After analysing the specific arrangements, the judge concluded that contracts entered into by the claimants prior to 31 October which became incapable of performance because of the Minister’s announcement  represented elements of the marketable goodwill in their businesses and therefore represented a possession protected by A1P1: [84].

The next argument was based upon legitimate expectation. The judge concluded that this could not act as a trump card to get round the “loss of future income” problem posed by Strasbourg case law. And even if in theory it could, it had to be linked to an interest in property which would be absent if there was no signed contract. Neither condition was satisfied in the case where there was a simple expectation of future profits but no signed contract.

Interference

The judge summarised the issues which arose under this heading as follows

110.The first issue in respect of interference is whether it is enough for the claimants to be able to point to “material economic consequences” (see Rix LJ in Malik) caused by the alleged action or whether, in order to constitute interference, that is only one of a number of necessary conditions which the claimants must establish.

111. The second debate, and the most interesting single issue in this case, is whether the making of the Written Ministerial Statement on Monday 31 October 2011 and the consultation document published on the same day constituted action by the defendant sufficient to trigger a claim under A1P1. It is the defendant’s case that the action was “merely a proposal” and would not and did not affect the obligations between the parties so as to give rise to an A1P1 claim.

112. There is also a third issue, raised by the defendant, to the effect that the concluded contracts were cancelled or repudiated, not by any action of the defendant, but by the claimants themselves, for economic reasons. The suggestion is that, in consequence, there is a causation argument open to the defendant, to the effect that it was not the proposal that caused any material economic consequences, but the claimants’ independent reaction to it.

The judge rejected the first contention. Material economic consequences were necessary to establish an A1P1 but did not by themselves amount to interference. For that some form of state action was required.

The second contention had been rejected by Mitting J in the initial judicial review (see my post here) and was rejected similarly by Coulson J. An unlawful proposal was enough. This was because the mischief arising out of the proposal was not what would necessarily happen in the future as a result, but the immediate ‘blight’ created by the possibility of that future action, in particular the effect upon those signed/concluded contracts predicated on the basis of the original subsidy of 43.3p per kWh. As the judge also observed,

it would be a very odd result in all the circumstances if the claimants could show possessions for A1P1 purposes, but could not show interference with those possessions because the proposal did its damage immediately, and therefore never needed to be enacted.

The judge was also unpersuaded by the argument that the claim for interference was based upon the claimants’ reaction to the proposal, as opposed to its inevitable economic consequences.

Justification

On this the SoS started a few points down.  If your action has been declared unlawful by a judge and the Court of Appeal, how do you later justify it under A1P1? Answer: with grave difficulty. The judge derived a good deal of assistance from the Infinis case at first instance (see my post here). On the face of it, if an interference was declared as unlawful, as a matter of principle, it could not be justified. The judge robustly rejected the SoS’s argument that because the unlawfulness was to do with the means by which the interference occurred, rather than the lawfulness of the SoS’s underlying intention.

it seems to me to be wrong in principle for the State to seek to defend itself by reference to something that it did not do, in order to divert attention away from the unlawful action that it did choose to take. The State has to take responsibility for its actions, and that includes its selected method of implementation.

Quite so. That is a very dodgy argument – we mean well, and that fact that we behaved unlawfully is neither here nor there; we could have behaved lawfully. And the judge was alive to its impracticability – a court would have to look at a hypothetical alternative legislative programme which could have been lawful in order to compare it with the method in fact adopted unlawfully.

Once unlawfulness was established, then fair balance did not and could not arise. But the judge rejected the SoS’s case on this as well. The unlawful act saved Government £1.6 bn. It caused losses of £200m to the claimants. In the absence of compensation to those claimants, a fair balance was not struck.

Just satisfaction

This was rather more fact-sensitive, and the judge could only make some initial observations. He rejected the submissions that granting damages would violate the principle that damages are not awarded for maladministration, and that damages should not be awarded if they were complex to establish or calculate. More positively for the claimants, he concluded at [158] that

the whole point of the FIT scheme was that private companies were positively encouraged by the Government to invest and take the commercial risk required. The defendant cannot now hide behind that structure (which it promoted) in seeking to avoid liability for the losses that it has caused.

Conclusion

This is a long post, for a good reason. This case is replete with human rights and public law arguments which I can only touch on. But I hope I have conveyed the scepticism expressed by the judge in response to some very flaky arguments advanced by the SoS.  And the findings are likely to lead to substantial damages for at least those operators who had signed contracts on the day the government pulled the rug on its previous proposals. A1P1, as I have repeatedly pointed out (see my posts below) is playing a significant part in developing our law of damages for unlawful governmental action.

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