Ultra Vires and Crédit Suisse Revisited
Has the real Ultra Vires now stood up to make a stand? Nicholas Dobson reviews the Court of Appeal's decision in the Charles Terence Estates case.
On 13 November 2012 the Court of Appeal found that Cornwall Council had not (as per Cranston J below) breached its fiduciary duty in failing to ascertain market rents for housing accommodation leased from a private supplier. But in doing so the Court also appeared to shift the tectonic plates of ultra vires and cast a revised light on the elusive nature of this canonic concept. The case was Charles Terence Estates Limited v. Cornwall Council [2012] EWCA Civ 1439, the leading judgment in which was given by Court of Appeal Civil Division Vice-President, Maurice Kay LJ, with which Moore-Bick LJ briefly and Etherton LJ substantively agreed.
Background
Cornwall Council’s predecessor authorities, Restormel and Penwith Borough Councils entered into arrangements with Charles Terence Estates (CTE) whereby CTE purchased identified properties and then leased them to the Councils which sublet or licensed them to groups including vulnerable people in priority need. When Restormel and Penwith ceased to exist (on Cornwall Council becoming the relevant unitary authority and taking over its predecessors’ rights and liabilities) Cornwall Council reviewed the CTE arrangements and stopped paying rent, although continuing to occupy and use the properties to house vulnerable people. On CTE issuing proceedings for recovery of unpaid rents Cornwall Council defended the claim (amongst other things) on the ground that the predecessor authorities had in making these arrangements breached fiduciary duties owed to their council taxpayers and consequently the leases with CTE were ultra vires and void.
As indicated, Cranston J at first instance agreed, taking the view that the parties had not considered market rents for any of these properties (which would in his view vary from property to property) but had dealt with the matter formulaically (whereby each rent was fixed even before the properties were identified and purchased). Since the Councils had utilised statutory powers to acquire property in breach of their fiduciary duty, the lease transactions in question were in his view ultra vires and therefore void.
Law
Section 17 of the Housing Act 1985 (requisition of land for housing purposes) (at section 17(1)(b)) empowers housing authorities to "acquire houses, or buildings, which may be made suitable as houses, together with any land occupied with the houses or buildings". And the power may be exercised for the purposes of providing housing accommodation. Cornwall Council argued that section 17 implies acquisition at a reasonable price which requires the authority to act in accordance with its fiduciary duty to council taxpayers.
The requirement on local and other public authorities to act prudently with the public monies entrusted to them (their fiduciary duty) has a long pedigree going back to Roberts v Hopwood [1925] AC 578 (where Lord Atkin referred to the duty on bodies charged with administering public or other extraneous monies as analogous to that of trustees). More recent cases include Prescott v Birmingham Corporation [1955] Ch 210 where a council scheme to offer free travel to senior citizens was found by the Court of Appeal to breach the fiduciary duty and Bromley LBC v Greater London Council [1983] 1 AC 768 where GLC’s scheme to reduce fares by 25% was in the circumstances concluded by Lord Diplock to be "a breach of fiduciary duty. . .ultra vires and therefore void".
However, as mentioned, the Court of Appeal did not agree that the Council’s actions amounted to a breach of fiduciary duty. There was no relevant market evidence to enable meaningful comparison and the present facts even "taken at their highest" did not reach the behaviour threshold of the leading cases mentioned e.g. the ‘flagrant violation’ found in Roberts v Hopwood. Nor was there any self-evident element of ultra vires such as underlay the leading case of Crédit Suisse v. Allerdale Borough Council [1996] 4 All ER 129 (Crédit Suisse – discussed further below ) where the authority pleaded its own lack of powers to escape a £6m guarantee liability to the bank.
But more fundamentally, said Maurice Kay LJ, "it will rarely be appropriate to read into a statutory power a limitation defined by something such as a 'reasonable price'". As to Wednesbury unreasonableness he considered that "the evidence falls well short of a lack of vires by reason of unreasonableness of the rent to be paid to CTE".
Whether the issue is examined on the basis of breach of fiduciary duty or ‘pure’ ultra vires Maurice Kay LJ concluded that the Judge had been wrong to find the leases void because of a failure to have regard to market rents. Contemporaneous internal Penwith documentation indicated a concern to procure "better quality, more cost effective temporary accommodation for the homeless vulnerable single people" and to reduce relevant budget spend. His Lordship found nothing to indicate that these objectives were not achieved by the arrangements with CTE which had acted in good faith throughout. Furthermore, entry into the leases did not require prior establishment of a housing revenue account (under section 74 of the Local Government and Housing Act 1989).
Consequences of Breach of Fiduciary Duty – Crédit Suisse Revisited
The Council’s contention was that however the situation is viewed the result was the same i.e. the leases were void and of no effect. And, as Maurice Kay LJ pointed out, it is plain from the Crédit Suisse judgment "that there are circumstances in which a public authority can successfully invoke its own public law error as a defence to a private law claim".
As those of a more mature vintage will well remember, in Crédit Suisse, Allerdale Council wished to facilitate the construction of a leisure pool complex to be financed by sales of timeshare accommodation. Because the Council wished to avoid contemporary capital expenditure and borrowing restrictions, it created a company to undertake the development which was to borrow the requisite monies from Crédit Suisse, facilitated by a £6m loan guarantee given by the Council. Unfortunately, timeshare sales were insufficient to service the loan and Crédit Suisse tried unsuccessfully to activate the Council guarantee. In consequent legal action the Council successfully argued both at first instance and in the Court of Appeal that it had lacked the statutory power to give the guarantee.
The lead judgment in Crédit Suisse had been given by Neill LJ. He noted that following Anisminic Ltd v Foreign Compensation Commission [1969] 2 AC 147 ". . .where in judicial review proceedings an order or decision is declared to be ultra vires on any of the grounds which are now available, the order or decision is as a matter of law void and a nullity". Consequently Neill LJ knew of:
". . . no authority for the proposition that the ultra vires decisions of local authorities can be classified into categories of invalidity. . . Where a public authority acts outside its jurisdiction . . . the decision is void. In the case of a decision to enter into a contract of guarantee the consequences in private law are those which flow where one of the parties to a contract lacks capacity. . . if, as I believe there to be, there is only one category of ultra vires decisions where a local authority is concerned I see no room for a judicial discretion."
Although the courts do in practice take a more nuanced view of the practical application of ultra vires than these dicta might suggest, it is the judgment of Neill LJ that often tends to be remembered. However, the Court of Appeal in Charles Terence highlighted as preferable the less celebrated Crédit Suisse judgment of Hobhouse LJ. He noted the breadth of meaning of the term ‘ultra vires’, and asked, for instance:
" . . What is the status of an ultra vires decision which the courts have declined to quash on proceedings for judicial review? In principle any such decision is to be regarded as 'void' and a 'nullity'. Yet the effect of the exercise of the court's discretion is to allow it to stand. Similar questions of theory and terminology exist in relation to the status of an unlawful decision or administrative act before it has been challenged and held to be 'ultra vires' (see Smith v East Elloe RDC [1956] 1 All ER 855. . .".
In the view of Hobhouse LJ, the answer (from relevant authorities) was that terms are used differently in administrative law from other branches of law. So before ‘using the phrase 'ultra vires' or the words 'void' and 'nullity', it is necessary to pause and consider the breadth of the meaning which one is giving them.’ For: "It is not correct to take terminology from administrative law and apply it without the necessary adjustment and refinement of meaning to private law. Where private law rights are concerned, as in the present case, the terminology must be used in the sense which is appropriate to private law."
Therefore, 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." Per Rolled Steel Products (Holdings) Ltd v British Steel & Corp and others [1985] 3 All ER 52, in private law the term ‘ultra vires’ has been used in two senses, i.e. (i) acts beyond the capacity of the company and therefore void and (ii) acts conducted within the capacity of the company but in excess or abuse of powers. In the latter case, also per Rolled Steel, a third party with notice of the excess of powers or abuse will be unable to enforce the transaction against the company. But in the view of Browne-Wilkinson LJ in Rolled Steel, in a corporate context, the phrase ‘ultra vires’ should be restricted to ‘where the transaction is beyond the capacity of the company and therefore wholly void’.
As for public law, (per Lord Hailsham in London and Clydeside Estates Ltd. v Aberdeen D.C. [1979] 3 All ER 876) it may be that Administrative Law courts are faced "not so much a stark choice of alternatives but a spectrum of possibilities in which one compartment or description fades gradually into another". As Lord Hailsham pointed out, the public law jurisdiction " . .is inherently discretionary and the court is frequently in the presence of differences of degree which merge almost imperceptibly into differences of kind".
So to return to the instant Charles Terence Estates case, Maurice Kay LJ said that if this were a case of ‘pure’ ultra vires in the sense as outlined by Hobhouse LJ of want of legal capacity, Cornwall Council would be able to rely upon it just as the Council did in Crédit Suisse. But since it is not, His Lordship found it "necessary to confront the difference in approach between Neill LJ and Hobhouse LJ". And of the two, he preferred that of Hobhouse LJ.
For Maurice Kay LJ did not "think that the assimilation of the various types of public law error in Anisminic had the effect of imposing a rule which extends inexorably to public law error as a defence to a private law claim". But whilst Crédit Suisse was a "clear case of lack of legal capacity", the predecessor councils in the instant case did what they were empowered to do by statute (section 17(1)(b) of the Housing Act 1985) "in order to meet their onerous statutory duties". It is true that (per Hobhouse LJ in Crédit Suisse) "breach of duty, fiduciary or otherwise, may be a defence depending on the circumstances". However, Maurice Kay LJ was "satisfied that the breaches in this case (if there were any) simply did not go to legal capacity". Therefore CTE’s appeal was allowed on the grounds that: (i) the Council had not established breaches of fiduciary duty or anything akin to it; and (ii) even if they had, such breaches would not sustain a defence to CTE’s claim.
Etherton LJ substantively agreed and highlighted an important practical aspect to the distinction between public law and private law concepts and remedies: "A remedy may be unavailable by way of judicial review because, for example, there has been delay in bringing the proceedings or the court refuses relief in the exercise of its discretion. By contrast, a transaction or act which is void for want of capacity is a nullity in private law whether or not proceedings are brought and irrespective of any lapse of time before any proceedings are brought, and there is no question of the court having any discretion or power to validate the transaction or act."
Furthermore: ". .as Hobhouse LJ pointed out in Credit Suisse judicial review can be brought by anyone who has a sufficient interest (presumably, in the present case, anyone who pays council tax or business rates) and is not limited to the parties to the private commercial transaction."
And in such matters ( from the Crédit Suisse analyses) Etherton LJ aligned himself firmly with Hobhouse LJ rather than with Neill LJ: "Insofar as . . .[Neill LJ]. . . indicated that any decision of a public body which could be impugned in judicial review proceedings is a nullity for all purposes, including the enforcement in civil proceedings of private law rights under a commercial agreement between the public authority and a third party, I respectfully do not agree with him. I agree with the different analysis of Hobhouse LJ in Credit Suisse".
Etherton LJ could see no sound reason why the ultra vires position should be any different where the issue is the validity of a commercial private law transaction between a public body and a third party. For: "The existence of public law remedies for breach of public law duties should make no difference to the private law consequences of ultra vires (want of capacity), on the one hand, and breach of duty in respect of a transaction within the capacity of the corporation, on the other hand."
Comment
Life is intricate and delights in fleetingly displaying different aspects of its infinite complexity. A tempting error is to seek simple overarching solutions to an infinite spectrum of intricacies. So whilst every law student learns of the evolution of ultra vires and the development of this prime corporate concept into public law and its consequent application to multifarious aspects of human experience, the original sense of the term can become blunted and lost amidst mists of complex and differing facts and circumstances. Charles Terence and the light it shines upon the less well-known judgment of Hobhouse LJ in Crédit Suisse reminds us of first principles and the discipline required to apply these to differing contexts.
So whilst public law remedies are discretionary (depending upon the public interest and the particular facts and circumstances), private law remedies depend upon the legal rights and defences of the parties. However, as Hobhouse LJ pointed out, in public law, the court’s discretion is wide, and can take into account many considerations, "including the needs of good administration, delay, the effect on third parties. . . [and]. . .the utility of granting the relevant remedy".
But whilst Peter Gibson LJ in Crédit Suisse understandably found it "unattractive" that Allerdale Borough Council had been seeking to assert its own illegality in order to evade contractual liability to the Bank, a local authority defence to a private law action would still be available if there were lack of capacity by the authority. Whilst this is probably less likely nowadays following the general power of competence, it is certainly not impossible. But anyone unwise enough deliberately to steer their authority in this direction, knowing of the lack of capacity, would risk prosecution for misconduct in public office.
Dr Nicholas Dobson is a Senior Consultant with Pannone LLP specialising in local and public law is also Communications Officer for the Association of Council Secretaries and Solicitors.