Loss from unlawful governmental action: the counterfactual?

11 March 2020 by David Hart KC

Vodafone et al v. Ofcom [2020] EWCA Civ 183

Ofcom make some unlawful regulations in 2015, under which telecom companies have to pay higher fees. The regulations were quashed in 2017. Four telecom companies want restitutionary damages, being the difference between the sums paid under the 2015 regulations and the sums they would have paid under their predecessors, the 2011 regulations.

Big money washing around: the claim was for over £200m.

Ofcom says – no, you are only entitled to the difference between the 2015 payments and the hypothetical fees which we could lawfully have charged had we done our job properly in 2017.

Sounds quite simple, but the answer goes deep into the intersection between public and private law.

The claim, as I have said, was restitutionary.

Ofcom said that the law of restitution is rooted in the private law of obligations. The private law approach (as with any tort claim) is to apply a “but for” test – what would the telecoms have paid but for the unlawfulness? This involves the counterfactual: what lawful fees could Ofcom have imposed?

The telecoms, and the Court of Appeal, disagreed. Ofcom’s argument offended the principles of legality, and parity (the principle that those who pay voluntarily should not be worse off compared to those who refuse to pay and litigate).

The telecoms’ case was simple. There was no lawful warrant for the charges paid. There was no lawful warrant for any charges leviable other than the extant 2011 Regulations, and Ofcom could not, and had not, made regulations retrospectively. They rested on the 1993 Woolwich case, in which the House of Lords said that Woolwich could seek the return of tax unlawfully demanded by the Revenue. Woolwich had not involved the counterfactual argument, but as the CA pointed out at [53] , the HL concluded that the “simple fact that the tax was exacted unlawfully should prima facie be enough to require its repayment”. This was because –

it is a fundamental principle of law that monies should not be levied without the authority of Parliament, and full effect can only be given to that principle if the return of taxes exacted under an unlawful demand can be enforced as a matter of right. [90]

Ofcom referred to cases involving administrative steps which were not taken but could have taken; in those circumstances, the counterfactual is those hypothetical steps.

The CA said that there was no precedent enabling this to be done in an unlawful taxation case. In a short concurring judgment, Underhill LJ observed that

Disallowing a counterfactual analysis in a case of the present kind may sometimes appear to give the payer a windfall, most obviously where the absence of lawful authority is simply the result of a drafting error.  But that is a necessary consequence of upholding the principle of legality. [110]

Conclusion

A robust upholding of the rule of law. Government has to get things right, and in a charges case, cannot seek to minimise its payout by saying that it could have done better, and had it done so, the loss would have been less.