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Cite as: [2013] BLGR 97, [2013] 1 WLR 466, [2012] EWCA Civ 1439, [2013] PTSR 175, [2013] HLR 12, [2012] WLR(D) 326

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		Neutral Citation Number: [2012] EWCA Civ 1439
		Case No: A2/2011/2773

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (CRANSTON J)
[2011] EWHC 2542 (QB)

Royal Courts of Justice
Strand, London, WC2A 2LL

13/11/2012

B e f o r e :

Lord Justice Maurice Kay, Vice President of the Court of Appeal,
Civil Division
Lord Justice Moore-Bick
and
Lord Justice Etherton
____________________

Between:

	Charles Terence Estates Limited	Appellant
	- and -
	Cornwall Council	Respondent

____________________

Mr Martin Rodger QC and Mr Joseph Ollech (instructed by Messrs Charles Russell LLP) for the Appellant
Mr James Goudie QC and Mr Guy Adams (instructed by Cornwall Council) for the Respondent
Hearing dates : 23-25 July 2012
____________________

HTML VERSION OF JUDGMENT
____________________

Lord Justice Maurice Kay :

It is well known that there are circumstances in which a public authority can escape liability to a private party by invoking its own lack of capacity in relation to a transaction. In Credit Suisse v Allerdale Borough Council [1996] QB 306, Peter Gibson LJ described such an outcome as "unattractive" but that case (to which I shall return) is a vivid example of successful resort to the principle. It was successfully raised by Cornwall Council (Cornwall) in the present case at first instance before Cranston J: [2011] EWHC 2542 (QB). Charles Terence Estates Ltd (CTE) now appeals against his order. At this stage a brief outline of the facts will suffice to set the scene. The judgment of Cranston J contains a very full account.

By Part VII of the Housing Act 1996 (as amended by the Homelessness Act 2002), local housing authorities are under statutory duties to secure accommodation for the unintentionally homeless who are in priority need. Those in priority need include persons with dependent children, those leaving care and individuals who are vulnerable because of mental illness, disability or other special reason. It has always been difficult to find suitable accommodation for the vulnerable groups. In 2002, central government began to take steps to reduce the number of families with children in bed and breakfast accommodation. It later committed itself to the reduction of households living in temporary accommodation. The policy included encouragement to local housing authorities to engage with the private sector. One way was for the authorities to take leases of residential accommodation from private owners and to sub-let or license the premises to those in housing need.

Restormel Borough Council (Restormel) and Penwith Borough Council (Penwith) were Cornish local housing authorities. They each entered into arrangements with CTE under which CTE purchased identified properties. CTE then leased them to Restormel or Penwith which then sublet or licensed them to their client groups, including vulnerable people who were in priority need. CTE financed the purchase of the properties partly by loans or grants from Restormel or Penwith but mainly by bank borrowing. Generally, the leases were for terms of 25 years. Some (Type A) contained a 10 year break clause and imposed only internal repairing obligations. Others (Type B) did not include a break clause and imposed full repairing obligations.

From 2006 or 2007, when the transactions were entered into, until April 2009, the arrangements proceeded as anticipated. However, on 1 April 2009 Restormel and Penwith ceased to exist and Cornwall, as the new unitary authority, took over their rights and liabilities. Cornwall reviewed the CTE arrangements and in or about July 2010 it stopped paying rent, although it has continued to occupy and use the properties to house vulnerable people. In due course, CTE commenced proceedings for recovery of the unpaid rents. Cornwall defended the claim, raising a number of defences, including assertions that Restormel and Penwith had breached fiduciary duties owed to their council taxpayers with the result that the leases were ultra vires and void. It counterclaimed for restitution of all sums paid to CTE as rent, grants or loans, subject to a credit for mesne profits at a modest level.

Cranston J had to consider many issues. I need not refer to those in respect of which he found in favour of CTE and which are not the subject of this appeal. For present purposes, I need only record that he found that Restormel and Penwith had breached their fiduciary duties by failing to have regard to market rents when agreeing the terms of the leases with CTE. He considered that, as a result of that failure, Restormel and Penwith had acted ultra vires and that the leases were therefore void (paragraph 80). He further found that, as there was no lawfully agreed rent, Cornwall was in occupation of the premises under tenancies at will, terminable at any time. However, Cornwall's restitutionary claim failed because CTE had at all times acted in good faith and had changed its position in reliance on the perceived validity of the leases. He considered that the equitable solution was that, since Cornwall had had the benefit of the properties as contemplated by the leases, the sums payable should be those agreed in the leases and that CTE should repay the loans in accordance with the relevant loan agreements.

The significant feature for present purposes is that, by invoking its own (in fact, its predecessors') lack of capacity which was the consequence of the breach of fiduciary duty, Cornwall succeeded in ridding itself of what it considered to be bad bargains. The key to this success was the failure to have regard to market rents. The principal questions arising on this appeal are (1) whether Cranston J was correct to find breaches of fiduciary duty; and (2) whether any such breaches have the seismic consequences which he found.

Breach of fiduciary duty

The threshold question on this appeal is whether the Judge was correct to find breaches of fiduciary duty. His reasoning was expressed as follows (at paragraph 80):

"… the parties never addressed what were the market rents for any of these properties. Given that market rents would vary from property to property, and over time from unit to unit within each property, a formulaic approach was incapable of producing market rents. The statutory powers of the councils to acquire property had to be construed in the light of the principle that they owed a fiduciary duty to their council taxpayers.

Compliance with their fiduciary duties demanded that their councils have regard to market rents on agreeing the rents payable to CTE for these properties. In failing to do so they acted outside their powers. The upshot is that the leases are void and of no effect."

In other words, the breaches of fiduciary duty went to the capacity of the Council to enter into the transactions which were therefore void. By "formulaic", the Judge meant that each rent was "fixed even before the properties were identified and purchased", on the basis that "the starting point … seems to have been the maximum sum which they could charge the residents of the properties and receive full rent rebate subsidy from central government, with some £55 deducted to cover management costs and voids" (paragraph 79). This produced the figure of £120 per unit per week.

The law

Section 17 of the Housing Act 1985 is headed "requisition of land for housing purposes". It confers on a local housing authority the power to

"acquire houses, or buildings, which may be made suitable as houses, together with any land occupied with the houses or buildings." (Section 17(1)(b)).

It is a power which may be exercised "for the purposes of this Part", viz the purposes of providing housing accommodation. It is common ground that the acquisition of houses includes acquisition by way of lease. There is a more general power to acquire land by agreement for the purposes of any of a council's functions pursuant to section 120 of the Local Government Act 1972 which could also supply the necessary vires but counsel have been content to assume that in the present case the councils were acting or purporting to act under section 17 of the Housing Act.

Section 17 says nothing about the consideration paid by a local housing authority for the acquisition. The case for Cornwall is that the power conferred by section 17 has to be read as a power to acquire at a reasonable price and that that requires those acting on behalf of the local housing authority to act in compliance with the fiduciary duty to council taxpayers. This, in turn, required the councils to have regard to market rents before entering into any commitment.

The use of the fiduciary concept in this context derives from a well-known line of authority. It began with Roberts v Hopwood [1925] AC 578, in which a council had paid its lowest grade of workers a minimum wage of £4 per week, notwithstanding that the cost of living had fallen during the year from 176% to 82% above its pre-First World War level. The council was motivated by the belief that it ought to act as a model employer towards its employees. The district auditor disagreed, considering that the excess payments were not wages but gratuities. The House of Lords upheld his surcharge on the excess. Lord Atkinson said (at page 594):

"The council would … fail in their duty if, in administering funds which did not belong to their members alone, they put aside all these aids to the ascertainment of what was just and reasonable remuneration to give for the services rendered to them, and allowed themselves to be guided in preference by some eccentric principles of socialistic philanthropy, or by a feminist ambition to secure equality of the sexes in the matter of wages in the world of labour."

The language now seems quaint but the principle he was describing was encapsulated later in his speech (at pages 595-596):

"A body charged with the administration for definite purposes of funds contributed in whole or in part by persons other than the members of that body, owes … a duty to those latter persons to conduct that administration in a fairly businesslike manner with reasonable care, skill and caution, and a due and alert regard to the interests of those contributors who are not members of the body. Towards these latter persons the body stands somewhat in the position of trustees or managers of the property of others."

He considered that acts done "in flagrant violation" of the duty should be held to have been done "contrary to law" within the meaning of the governing statute.

Prescott v Birmingham Corporation [1955] Ch 210 was concerned with the provision of free travel to senior citizens – a matter which is now governed specifically by statute. However, in 1953 the scheme in question was the brainchild of councillors whose decision was successfully challenged by a ratepayer. Jenkins LJ, giving the judgment of the Court, said (at pages 235-236):

"Local authorities are not, of course, trustees for their ratepayers, but they do, we think, owe an analogous fiduciary duty to their ratepayers in relation to the application of funds …

… we would … regard it as illegal, on the ground that … it would amount simply to the making of a gift or present in money's worth to a particular section of the local community at the expense of the general body of ratepayers …

… We think it is clearly implicit in the legislation, that while it was left to the defendants to decide what fares should be charged within any prescribed statutory maxima for the time being in force, the undertaking was to be run as a business venture, or, in other words, that fares fixed by the defendants at their discretion, in accordance with ordinary business were to be charged."

The Court considered that the scheme was "wholly beyond the powers of the corporation" (page 237) or an improper exercise of a discretionary power (page 238).

In Bromley LBC v Greater London Council [1983] 1 AC 768, which was also concerned with statutory powers in relation to fares which the GLC wished to reduce by 25%, Lord Wilberforce referred (at 815B) to "a duty of a fiduciary character to its ratepayers", the extent of which had been described in Prescott, "which remains valid in principle although free travel for selected categories has since been authorised by statute". He concluded (at page 820D):

"… once it became apparent that the ratepayers' burden would be approximately doubled, it acted in breach of its fiduciary duty … It failed to hold the balance between the transport users and the ratepayers as it should have done."

Lord Diplock referred (at page 828F) to the particular statutory duty as a

"collective legal duty … to make choices of policy and of action that they believe to be in the best interests (weighing, where necessary, one against the other) of all those categories of persons to whom their collective duty is owed. This will involve identifying the persons to whom the particular duty is owed and in the event of a conflict of interest between one category and another deciding where the balance ought to lie."

He concluded that the scheme was "a breach of fiduciary duty … ultra vires and therefore void" (page 830F).

Lord Keith considered the scheme to be "arbitrary" and "ultra vires" (page 835F) and preferred to express no view on the alternative, Wednesbury, analysis.

Lord Scarman adopted (page 838G) the language of fiduciary duty. He considered that the GLC had "abandoned business principles" which was "a breach of duty owed to the ratepayers and wrong in law" (page 846F). Lord Brandon held that the GLC had acted beyond its powers (page 852E) and had exercised its discretion unlawfully by reason of its failure "to balance fairly against each other the interests of the travelling public on the one hand and those of the ratepayers … on the other" (page 853E).

There is no doubt that this line of authority establishes that some decisions of local authorities will amount to a breach of fiduciary duty or of a duty analogous to a fiduciary duty and that, in public law proceedings at the suit of an interested party, the decision may be characterised as ultra vires and void. The present case, which takes the form of private law proceedings in which a local authority is seeking to rely on its own breach of duty to escape contractual obligations, is at first sight, conspicuously different. However, it is clear from Credit Suisse v Allerdale Borough Council [1997] QB 306, a decision of this Court, that there are circumstances in which a local authority can raise its own lack of capacity as a defence to an action to enforce an apparent contract. I shall return to Credit Suisse later when I consider the consequences of a breach of duty by a local authority. For the moment, I am concerned simply with the question whether a breach of duty is established in this case.

Discussion

As found by Cranston J, the breach of fiduciary duty resided solely in the failure to have regard to market rents. Transposed to the private corporate sector, I doubt that that would be characterised as a breach of a company director's fiduciary duties – more a matter of his duty of skill and care. The Judge's findings elsewhere in the judgment tend to negate breaches of fiduciary duty in the classic sense. For example, when rejecting Cornwall's case on improper purpose, he said:

"83…There is no evidence that the housing benefit system was being abused or that the rents charged to residents by the council were excessive. What residents paid was gauged by how rent rebate subsidy was paid and what the councils paid to CTE had no regard to market rates, but that is not the same thing as abuse or excessive charging. Clearly the leases with both councils should have had effective adjustment clauses, in the light of changes to the housing benefit system, but the council's incompetence in that regard is not equivalent to their acting for an improper purpose or in the light of irrelevant considerations.

…

85…The primary purpose of the leases taken by both councils was to enable them to discharge their statutory duties to provide accommodation and to meet central government targets …"

These are important findings, all the more so in the complete absence of any element of private profit, conflict of interest or off-piste political judgment.

Next, there are obvious difficulties in identifying the particular market which would need to be considered in order to sustain a market rent obligation. If it is the market wherein local authorities pay rent to private property owners in relation to property which is then let or licensed to those in priority housing need, there was no evidence before the court that such a market had developed to the point of permitting meaningful comparison. If, on the other hand, the relevant market is one in which the private property owner might let his property to unremarkable tenants, either for sole or multiple occupation, market rents would be calculable and amenable to expert evidence. However, there was no such evidence in this case (a late application for permission to adduce some having been rejected) and, in any event, this tends to conceal the reality that this case concerns parties on both sides who were striving to devise relatively novel arrangements under which the local authorities could "discharge their statutory duties to provide accommodation and to meet central government targets" in a less costly and more satisfactory way than by resort to bed and breakfast arrangements and the like.

When one compares this case with the leading authorities in which the breach of fiduciary duty approach was propounded and in which it succeeded, it seems to me that the present facts, taken at their highest, establish significantly less culpability. There is no evidence of "eccentric principles" or of "flagrant violation" of the kind found in Roberts v Hapwood, or of "the making of a gift or present" to CTE, to use the language of Prescott, or doubling of the ratepayers' burden as had occurred in the Bromley case. Nor was there the self-evident element of ultra vires that underlay Credit Suisse (see below, paragraph 29). In the present case, the attempt to present it as one of "pure" ultra vires depends upon reading the words "at a reasonable price" into section 17(1)(b) of the Housing Act 1985. There are two reasons for rejecting that approach. The first is that, in the absence of expert evidence, there is no basis for concluding that the rents were not "a reasonable price".

The second reason is more fundamental. In my judgment, it will rarely be 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. It is surprising to see a local authority contending for that. It is something that courts are alert to avoid. In Gibb v Maidstone & Tunbridge NHS Trust [2010] EWCA Civ 678, this Court was concerned with an attempt by the Trust to avoid liability under a severance agreement on the grounds that it was ultra vires by reason of "irrational generosity". Sedley LJ said (at paragraph 57):

"But none of this comes close to justifying the retaking by a court of a financial and management decision which lay within the powers and purposes of the Trust, whatever reservations the court itself might have had about the computation and cost of the deal. To start by dissecting the figures is both to assume the very thing that has yet to be established – that the Trust has exceeded its own powers – and to substitute the court's judgment for that of the Trust. It is only if the figures are inexplicable on their face, or palpably inflated in the light of evidence, that the court will in general be justified in examining their elements, and then not in order to remake the calculation but to see if it has indeed gone beyond the bounds set by law."

I do not say that Gibb and the present case are on all fours but they both illustrate the need for a court not to justify intervention by adopting an expansive approach to vires and fiduciary duty.

As in many other circumstances, the local authorities in the present case had complex statutory powers and duties in relation to a difficult area of social provision which is circumscribed by the evolving policies of central government. They had to make multi-factorial decisions, balancing various matters and interests. In Pickwell v Camden LBC [1983] QB 962 a district auditor sought to characterise payments to council members following settlement of a strike as "contrary to law". Ormrod LJ, giving the judgment of the Court, said (at page 1004F):

"… on any view, the increase was large, and from [the union's] point of view, the outcome of the strike was probably more favourable than they expected. But the question for the court is not whether Camden made a bad bargain for the ratepayers, or were precipitate in making the offer to the strikers, or could have achieved a cheaper settlement by waiting, or made a better bargain by different tactics … The question for the court is whether the evidence establishes that no reasonable local authority could have made a settlement on such terms."

The evidence before the court was "quite insufficient" for that purpose.

Although the approach there was in the context of Wednesbury unreasonableness as a facet of what was "contrary to law" within the meaning of section 161 of the Local Government Act 1972, it resonates in the present context where the statutory power to acquire houses conferred by section 17(1)(b) of the Housing Act is submitted to embrace a limitation based on the reasonableness of the price. In my judgment, the evidence falls well short of a lack of vires by reason of unreasonableness of the rent to be paid to CTE.

It follows that, whether one examines this case by reference to breach of fiduciary duty or of a duty akin to a fiduciary duty or by reference to "pure" ultra vires as the basis of such a breach, I conclude that the Judge was wrong to find that the leases were void because of a failure to have regard to market rents. There was neither a legal nor an evidential basis for such conclusion in the circumstances of this case. I do not propose to rehearse the details of the evidence in the court below. The overarching submission on behalf of CTE is that, as a result of the arrangements that were made, the outcome was the provision of an improved service to a vulnerable group at reduced cost to the local authorities. I do not think that this can be gainsaid. Moreover, not only did Cornwall come to court without expert evidence to support its case; it chose not to call as witnesses a number of employees and former employees, some of whom had made statements. These are unpromising circumstances in which to attempt to substantiate a breach of one's own fiduciary duty.

Contemporaneous internal documents from Penwith show a concern to procure "better quality, more cost effective temporary accommodation for the homeless vulnerable single people" and a desire "to reduce the budget spend on temporary accommodation by providing alternatives to B&B and other high cost temporary accommodation". There is nothing to say that these objectives were not achieved by the arrangements with CTE which itself acted in good faith throughout. Mr Allan Hampshire was Penwith's Head of Housing, Health and Community Safety at the time and he is now employed by Cornwall in a senior position. His witness statement describes the difficulties facing Penwith at the time, including a high number of homeless clients many of whom private landlords and housing associations were unwilling to assist and the high expense of bed and breakfast arrangements. On the other hand, the proposed arrangement with CTE and its associated company offered a "unique" opportunity with the "prime aim of addressing urgent needs of homeless clients whilst restricting Penwith's financial commitment". Contemporaneous documentation from Restormel which was signed off by its then Head of Housing, Ms Karen Waters, includes similar sentiments. She was not called as a witness. It may well be that, as the judge found, the local authorities were careless in agreeing twenty five year leases without adequate safeguards against adverse adjustments in the finance of housing benefit by central government. However, that was not the basis of his finding of breaches of fiduciary duty. Nor, in my view, could it have been. My overall conclusion on this threshold issue is that we are simply not in that territory. That would be sufficient in itself to allow this appeal, but I propose also to consider the consequences of any such breaches, even if the Judge had been correct in finding them.

Before doing so I ought to refer to another argument which was advanced on behalf of Cornwall. By section 74 of the Local Government and Housing Act 1989 a local housing authority is required to establish a Housing Revenue Account in relation to sums falling to be credited or debited in respect of, inter alia, houses provided under Part II of the Housing Act 1985 and land which has been acquired or appropriated for the purposes of that Part. Before the judge, Cornwall contended that Restormel and Penwith had failed to comply with this obligation and that their failure vitiated the disputed leases. He rejected the submission that the establishment of a Housing Revenue Account is a condition precedent to the lawful exercise of the power in section 17 of the Housing Act 1985. In my judgment, he is right to do so. Section 74 of the Local Government and Housing Act 1989 is not concerned with requirements in relation to individual transactions. Moreover, as the judge observed (at paragraph 70), the issue in this case is not the validity of the arrangements entered into between the councils and their own tenants but the validity of the leases entered into between the councils and CTE. Entry into those leases did not require the prior establishment of a housing revenue account. There is nothing in this aspect of the case to fortify Cornwall's attack on the validity of the disputed leases.

The consequences of breaches of fiduciary duty

As I have related, the judge's conclusion (at paragraph 80) was that a failure to have regard to market rents meant that the local authorities had acted ultra vires and that the leases were therefore "void and of no effect". I understand that conclusion to embrace a finding that the power conferred by section 17(1)(b) of the Housing Act is limited to acquisition at "a reasonable price", although, as I have said, I do not consider that it is appropriate to circumscribe the vires in that way. If I am wrong about that and in my conclusion about the threshold issue, what would the consequences be? The case for Cornwall is that, whether one looks at this through the lens of fiduciary duties or as a case of "pure" ultra vires, the result is the same: the leases were and are void and of no effect. The building blocks for this submission are (1) the triumvirate of cases – Roberts v Hopwood, Prescott and Bromley – which established the application of fiduciary duties or something akin to them in this area; (2) the assimilation of the various types of public law error in Anisminic Ltd v Foreign Compensation Commission [1969] 2 AC 147; and (3) the Credit Suisse case which is relied upon as a paradigm for cases in which public law error is raised by a public authority as a defence to a private law claim.

The triumvirate of cases was not concerned with attempts to enforce private law rights. The cases were concerned with judicial review at the behest of persons with a sufficient interest to seek it. However, it is plain from Credit Suisse 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.

In Credit Suisse, the bank sought to recover a substantial sum pursuant to a guarantee which the council had purported to execute to support a financing arrangement under which a limited company created by the council was to develop a site by building a leisure pool and timeshare units. Providing timeshare units was not within the statutory powers of a local authority. It was held that the establishment of the company and the giving of a guarantee by the council were part of a scheme designed to circumvent the controls imposed on local authority borrowing by Schedule 13 to the Local Government Act 1972 and fell outside the express and implied powers of the council. They were ultra vires. Since the council had lacked capacity to enter into the guarantee, it was void and the bank could not sue upon it.

A close analysis of the judgment in Credit Suisse demonstrates that the ratio is founded upon what I have called "pure" ultra vires, giving rise to lack of capacity. As a matter of construction, the council did not have the express or implied power to create the company in question or to guarantee its debts. On that, all three members of the Court of Appeal were agreed. Thereafter, their unanimity evaporated. It is the lead judgment of Neill LJ that is relied upon by Cornwall in the present case. Having traced the history of the ultra vires doctrine in relation to both public authorities and limited companies (as to which it has been substantially relaxed by modern companies legislation), he landed upon Anisminic, which brought to an end the distinction between decisions of public authorities which went to jurisdiction or capacity and were void or a nullity and those which were vitiated by legal error "within jurisdiction" and were simply voidable. Neill LJ summarised the position thus (at page 340G):

"It follows [from Anisminic] therefore that 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."

He then noted the limits to this proposition in judicial review proceedings (at page 341D):

"… [in] the context of judicial review a decision of a public authority, which as a matter of law is ultra vires, may survive and remain effective if the applicant for a remedy is adjudged to have no sufficient interest or there has been undue delay … "

Moreover, even a successful claimant may be denied some or all of his relief on discretionary grounds (page 342C).

Turning to the context of ultra vires in public law (in the wide, Anisminic sense) as a defence to a private law claim, Neill LJ said (at pages 343D-344C):

"I know of no authority for the proposition that the ultra vires decisions of local authorities can be classified into categories of invalidity. I do not think that it is open to this court to introduce such a classification. Where a public authority acts outside its jurisdiction in any of the ways indicated by Lord Reid in Anisminic … , 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. I see no escape from this conclusion … 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."

He thought that his approach accorded with Wandsworth LBC v Winder [1985] AC 461. Winder, I observe, was not a case of a local authority relying on its own unlawful act – on the contrary, it was raised by a tenant as a defence to a claim for rent arrears.

Peter Gibson LJ did not venture into this territory, being content to decide the case on a "pure" ultra vires basis.

The approach of Hobhouse LJ to the wider question was markedly different from that of Neill LJ. He said (at pages 356D-357E):

"In resolving a private law issue it is always necessary to have regard to who are the actual parties to the issue. This may affect the analysis of the issue and the answer which private law gives to it. Some improper conduct of the decision-making body may be material within the broader spectrum of administrative law but it will not necessarily be material as between the parties to a private law dispute …

… considerations of the knowledge of, or degree of notice to, a party who is asserting a private law right may be relevant to the question whether the right is enforceable against another where there has been some irregularity in the transaction which is alleged to have given rise to the right.

Private law issues must be decided in accordance with the 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. Public law, that is to say, the law governing public law entities and their activities, is a primary source of the principles applied in administrative law proceedings. The decisions of such entities are the normal subject-matter of applications for judicial review. When the activities of a public law body, or individual, are relevant to a private law dispute in civil proceedings, public law may in a similar way provide answers which are relevant to the resolution of the private law issue. But 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.

… [Counsel's] arguments make the error … of using administrative law language and concepts without making the necessary adjustments. It remains necessary to ask what amounts to a defence to a private law cause of action. Want of capacity is a defence to a contractual claim; breach of duty, fiduciary or otherwise, may be a defence depending on the circumstances. To say that administrative law categorises all grounds for judicial review as 'ultra vires' does not assist. In civil proceedings the question is whether, after taking into account the relevant public law, there is on the facts a private law defence. By a parity of reasoning, how a Divisional Court would have decided an application for judicial review and what remedy, if any, it would have granted in the exercise of its discretion is not material."

On the facts, the case was a clear case of want of capacity as a defence.

After the hearing of the present appeal, our attention was drawn to Bedfordshire County Council v Fitzpatrick Contractors Ltd [2001] LGR 397 in which, at first instance, Dyson J appears to have found the reasoning of Neill LJ to be "more compelling" than that of Hobhouse LJ but that was a very different case from the present one, both procedurally and substantively. I should add that, here, Cornwall also seeks to rely on the well-known case of Boddington v British Transport Police [1999] 2 AC 143 but that seems to me to be of limited assistance in the present context because its matrix was the raising of a public law defence not in civil proceedings but in the face of a criminal prosecution.

Returning to the present case, if this were a case of "pure" ultra vires in Hobhouse LJ's sense of want of legal capacity, Cornwall would be able to rely upon it just as the council in Credit Suisse did. However, if, as I hold, this is not a case of "pure" ultra vires, it is necessary to confront the difference in approach between Neill LJ and Hobhouse LJ.

In my judgment, the approach of Hobhouse LJ is to be preferred. I do 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. There is no logical reason why it should and this case demonstrates why it should not. 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. Credit Suisse was a clear case of lack of legal capacity. Here, however, Penwith and Restormel were doing what they were empowered to do by section 17(1)(b) in order to meet their onerous statutory duties. I would respectfully adopt the words of Hobhouse LJ: "breach of duty, fiduciary or otherwise, may be a defence depending on the circumstances". I am satisfied that the breaches in this case (if there were any) simply did not go to legal capacity. At some point, it will be desirable for there to be judicial consideration of the territory between the extremes of Credit Suisse and the present case. I have come to the conclusion that we have not heard sufficient argument to enable us to articulate more comprehensive guidance.

Conclusion

It follows that, for the reasons I have given, I would allow CTE's appeal on the grounds that (1) Cornwall have not established breaches of fiduciary duty or anything akin thereto and (2) even if they had, the breaches would not sustain a defence to CTE's claim. In the circumstances, it is unnecessary to consider other issues raised in argument but I have to say that I see considerable force in the criticism of the finding that Cornwall's position in relation to the properties was merely one of tenancies at will. Such a conclusion has scant regard to the temporal/periodic payment of rent.

Lord Justice Moore-Bick:

I agree that the appeal should be allowed for the reasons given by Maurice Kay L.J. and Etherton L.J., whose judgments I have had the benefit of reading in draft.

Lord Justice Etherton:

I agree that this appeal should be allowed for the reasons given by Lord Justice Maurice Kay. I add a short judgment of my own because we are reversing the full and careful decision of Cranston J and because important issues have been raised about the relationship between public and private law concepts of ultra vires.

I agree with Lord Justice Maurice Kay that there was no proper evidential basis for the conclusion of the Judge that Restormel and Penwith had breached their fiduciary duties by failing to have regard to market rents when agreeing the terms of the leases with CTE. No expert evidence was adduced as to whether any relevant market existed and, if so, what was the market and what was the level of market rents. Nor was there any evidence as to what loss Restormel and Penwith had suffered as a result of the rent levels specified in the leases with CTE. Nor was there any evidence that, when agreeing the leases with CTE, the relevant officers and the councillors were unaware of the level of market rents should any market have existed. On the other hand, there was evidence that landlords would be reluctant to let accommodation to the type of vulnerable people in question and would require higher rents to be paid than would otherwise be the case. There was no evidence that anyone other than local authorities would be willing to take leases of buildings divided into separate units of accommodation for such tenants: the evidence was that housing associations were not willing to do so.

It follows that Cornwall cannot establish that there was a breach of fiduciary duty or quasi-fiduciary duty by Restormel or Penwith by virtue of the rent provisions in the leases.

The Judge was right to reject Cornwall's claim that the leases with CTE were void because Restormel and Penwith had not set up a Housing Revenue Account (an "HRA") under section 74 of the Local Government and Housing Act 1989 before exercising the power under section 17 of the Housing Act 1985. It is perfectly plain from the language of section 74 of the 1989 Act that an HRA only had to be set up if and when money was actually received which needed to be put in that account. Furthermore, it is obvious that the setting up and running of an HRA is a matter of book-keeping. There is nothing express or implied in the 1989 Act to indicate that a transaction which will in the future give rise to income to feature in such an account is a nullity if at the date of the transaction the book-keeping account is not in place.

That is sufficient to dispose of the appeal. There was much debate before us, however, on the wider point of principle about the relationship between private law and public law concepts of ultra vires.

In my view, the principled approach to that issue is clear. If a transaction is beyond the capacity of a statutory corporation, it is void: that is, it was always a nullity.

A corporation can only act by its agents. If its agent enters into a transaction with a third party which is beyond the agent's actual or apparent authority, the transaction is a nullity since the act of the agent was never binding on the corporation. Apparent authority depends upon whether the principal made a representation to the third party about the agent's authority and whether the third party had knowledge of any limitation on the existence or scope of that authority.

If the transaction with the third party was within the capacity of the statutory corporation and was within the actual or apparent authority of its agent, then, even if the transaction was a breach of duty by the corporation or by its agent, the transaction is not void. Depending on the facts, the corporation may have legal or equitable rights against the third party, such as for mistake, unjust enrichment or as a constructive trustee, but the transaction itself is not a nullity.

In the private law context of a company the point was explained by Browne-Wilkinson LJ in his classic exposition in Rolled Steel Products (Holdings) Limited v British Steel Corporation [1986] Ch 246, 302 to 303 and 304 as follows:

"The judge drew a distinction between two meanings of ultra vires which he called the "narrow sense" and the "wider sense." As I understand his judgment, he treated ultra vires in the narrow sense as covering any transaction outside the express or implied powers of a company stated in its memorandum of association and ultra vires in the wider sense as covering a transaction which, although within such powers, is entered into in furtherance of "some purpose which is not an authorised purpose": [1982] 1 Ch. 478, 497. Although it is not entirely clear, he appears to have treated transactions which are ultra vires in his narrow sense as being wholly void as opposed to those which are ultra vires in the wider sense, which are capable of conferring rights on third parties who have no notice of the invalidity: see p. 499. He then apparently held that the guarantee by the plaintiff was ultra vires in the wider sense and, since British Steel Corporation had notice of that fact, it was unenforceable by British Steel Corporation.

In my judgment, much of the confusion that has crept into the law flows from the use of the phrase "ultra vires" in different senses in different contexts. The reconciliation of the authorities can only be achieved if one first defines the sense in which one is using the words "ultra vires." Because the literal translation of the words is "beyond the powers," there are many cases in which the words have been applied to transactions which, although within the capacity of the company, are carried out otherwise than through the correct exercise of the powers of the company by its officers: indeed, that is the sense in which the judge seems to have used the words in this case. For reasons which will appear, in my judgment, the use of the phrase "ultra vires" should be restricted to those cases where the transaction is beyond the capacity of the company and therefore wholly void.

A company, being an artificial person, has no capacity to do anything outside the objects specified in its memorandum of association. If the transaction is outside the objects, in law it is wholly void. But the objects of a company and the powers conferred on a company to carry out those objects are two different things: see Cotman v. Brougham [1918] A.C. 514 especially per Lord Parker of Waddington, at p. 520, and per Lord Wrenbury, at p. 522. If the concept that a company cannot do anything which is not authorised by law had been pursued with ruthless logic, the result might have been reached that a company could not (i.e., had no capacity) to do anything otherwise than in due exercise of its powers. But such ruthless logic has not been pursued and it is clear that a transaction falling within the objects of the company is capable of conferring rights on third parties even though the transaction was an abuse of the powers of the company: see, for example, In re David Payne & Co. Ltd. [1904] 2 Ch 608. It is therefore established that a company has capacity to carry out a transaction which falls within its objects even though carried out by the wrongful exercise of its powers. …

The critical distinction is, therefore, between acts done in excess of the capacity of the company on the one hand and acts done in excess or abuse of the powers of the company on the other. If the transaction is beyond the capacity of the company it is in any event a nullity and wholly void: whether or not the third party had notice of the invalidity, property transferred or money paid under such a transaction will be recoverable from the third party. If, on the other hand, the transaction (although in excess or abuse of powers) is within the capacity of the company, the position of the third party depends upon whether or not he had notice that the transaction was in excess or abuse of the powers of the company."

I can see no sound reason why the position should be any different where what is in issue is the validity of a commercial private law transaction between a corporation which is a public body and a third party. 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.

As was the case in respect of companies before Rolled Steel, the problem has arisen in the context of public bodies because the terms "ultra vires", "illegal" and "unlawful" have been used both in a narrow (incapacity) sense and in a wider (breach of powers or duties) sense. The terms have been used to describe public law acts both where the acts were unlawful and void as outside the capacity of the public body, and also where what was in issue was Wednesbury unreasonableness which makes a public act unlawful but is normally a matter of improper exercise of powers rather than lack of capacity.

Cornwall relies on the reasoning of Neill LJ in Credit Suisse v Allerdale Borough Council [1997] QB 306. That case was about capacity. Having found that the council in that case had no capacity, Neill LJ went on to consider (obiter) improper purpose. Insofar as he 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, particularly his comments at pages 355, 356 and 357 as follows:

"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. 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. … Private law issues must be decided in accordance with the 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. Public law, that is to say, the law governing public law entities and their activities, is a primary source of the principles applied in administrative law proceedings. The decisions of such entities are the normal subject matter of applications for judicial review. When the activities of a public law body, or individual, are relevant to a private law dispute in civil proceedings, public law may in a similar way provide answers which are relevant to the resolution of the private law issue. But after taking into account the applicable public law, the civil 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. … In the present case, counsel have advanced arguments which have called into question the relationship between private law and administrative law. ... It remains necessary to ask what amounts to a defence to a private law cause of action. Want of capacity is a defence to a contractual claim; breach of duty, fiduciary or otherwise, may be a defence depending upon the circumstances. To say that administrative law categorises all grounds for judicial review as "ultra vires' does not assist. In civil proceedings the question is whether, after taking into account the relevant public law, there is on the facts a private law defence. By a parity of reasoning, how a Divisional Court would have decided an application for judicial review and what remedy, if any, it would have granted in the exercise of its discretion is not material."

There is an important practical aspect to this difference 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. As Sedley LJ pithily observed in Gibb v Maidstone & Tunbridge Wells NHS Trust [2010] EWCA Civ 678 at [52]:

"It is serious enough if a private law corporation reneges on its agreements for want of power to make them ... . It is even more serious if a body incorporated by statute for public purposes can do so in a case such as the one before the court. This is not only because public bodies, with access to competent legal advice, can be expected not to act on whims and, when accused of doing so, are generally found not to have done so. It is because if a public body can denounce its own commercial agreements as having been excessively generous – in other words can invite the court to recalculate its liability – it will not be only at the authority's own instance that this can happen. It will be able to happen at the instance of any person or body with a sufficient interest - here, for example, a local patients' organisation or the Secretary of State or even … a dissident member of the body itself. It does not matter, I readily accept, that this might create an entire new litigation industry: as Holt CJ said in Ashby v White (1703) 2 Ld. Raym. 938, "if men will multiply injuries, actions must be multiplied too". What matters is that the autonomy of statutory bodies like the Trust will be irrevocably compromised: the enlargement of what counts as a public law wrong will mean that every financial decision of a public body is open to scrutiny by the courts on the motion of anyone with a sufficient interest. Only the legal profession would regard such a development as desirable."

For those reasons I do not agree with Cornwall or the Judge that, if (contrary to my view) Restormel and Penwith were in breach of their fiduciary or quasi fiduciary duties in taking the leases from CTE having regard to the rents reserved, the grant of the leases was a nullity even if their acquisition was within the legal capacity of Restormel and Penwith.