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Contractual rights are property rights: Government blunder on feed-in tariffs

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The UK Government faces a bill for up to £200m in compensation to green energy installers that suffered losses as a result of former energy secretary Chris Huhne’s 2011 announcement on proposed cuts in environmental subsidies. The announcement led to many organisations and individuals dropping plans to install solar power with feed-in tariff (FIT) equipment that feeds electricity generated by small-scale solar panel systems into the grid, producing a payment.

A legal ruling in the High Court (Breyer Group plc & Others v DECC issued 9 July 2014 ) is the second time in a week that the government has been show to have fallen foul of the principle that the law should not be retrospectively changed if it damages people’s interests. (See the Poundland case: UK Human Rights Blog)

Are contracts property?
The High Court established in its ruling on preliminary legal issues that pre-existing contracts to supply the solar micro-generation equipment constitute “property” for the purposes of protection of property rights under the European Convention on Human Rights. Furthermore, Huhne’s announcement, which proposed bringing forward a reduction of the subsidised payment, constituted an “interference” with those property rights. This should potentially be compensated, said Mr Justice Coulson.

The 31 October 2011 announcement that cuts in the feed-in payment might be brought forward amounted to a retrospective change in legislation without passing new legislation through Parliament. “The proposal would have taken away existing entitlements without statutory authority.” The announcement damaged businesses and hit consumers who had planned to install the equipment on the basis of the higher payments. As such it breached ECHR Article 1 Protocol 1 (A1P1) on protection of property rights regarding contracts concluded on or before the day of the announcement.

Breyer Group plc, HomeSun Holdings and Touch Solar were among installers and potential micro-generators bringing the case against the Department of Energy and Climate Change (DECC) – which established the principle that the Government can be held monetarily responsible for the effects of its announcement – even if a mere proposal. The Government had argued that a mere proposal cannot amount to interference with property for the purpose of A1P1 claims.

Huhne and DECC thought the initial rates were too generous to generators of solar electricity. Huhne announced the date by which the installations had to be commissioned/registered in order to qualify for the highest FIT rate would be brought forward, from 1 April 2012 to 12 December 2011 – prompting many people to drop plans.This happened even though Huhne had 10 days earlier told Parliament “this Government is very committed to not having retrospection in legislation and legislative changes”.

Article 1 Protocol 1 states:

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.”

Mr Justice Coulson noted: “The claimants [potential energy generators, solar panel suppliers and others] argued that, if the Government could avoid the devastating consequences of its own actions by saying that the change to the date was merely a proposal, then the way would be open for the Government to cause huge financial losses to its citizens without regard to the consequences, by claiming that a mere proposal cannot amount to interference for A1P1 purposes. On the other hand, the defendant [DECC] maintains that, if the claimants’ claims were allowed, no Government would be able even to propose modifications to policy in future without risking huge losses, even if those proposals were never actually implemented. They say this would give rise to a limitless field of potential liability far beyond anything envisaged by A1P1. (Breyer Group plc and Others v DECC, paras 41-2)

Coulson favoured the claimants’ view. He ruled that, in principle, signed or concluded contracts constituted “property” in terms of A1P1 citing Lewison J in Murungaru v Secretary of State for the Home Department [2008] EWCA Civ. 1015: “A claim justiciable in domestic law can amount to a possession for the purposes of A1P1 only if it is sufficiently established to be enforceable.” The contracts were sufficiently established and hence have a value even if not yet realised before the work is done. “They were tangible; they were assignable; on the face of it they had a present economic value.” (Coulson para 51) Contracts not signed would not count as property unless the work had commenced without signing and with details of the contract yet to be agreed.

There is no property in loss of potential future income for A1P1 purposes nor in continuing to enjoy a particular level of trade since “a possible contract in the future is, on the European analysis, no more than a hope or aspiration, and cannot be regarded as an asset or possession”. (Para 60)

However, financial goodwill in a company may be covered: “Whilst loss of future income is not protected by A1P1, marketable goodwill may be, although sensibly distinguishing between the two is a Herculean task.” (Para 45) Goodwill represents work put into a business to establish it. It has a market value which is transferable so constitutes property – which governments should not interfere with.

Was interference justified?
The Government argued that the number of feed-in schemes had increased more than was anticipated in part because of the reduced costs of setting up the equipment. Rates of returns on investment rose above the 5-8% on which the scheme was based. The “subsidy” actually comes from all other consumers of electricity so it was fair to curb the scheme. The change would save £1.6bn. Coulson nevertheless ruled that the Government’s behaviour could not be justified. An earlier Court of Appeal hearing had established that “Section 41 [of the Energy Act 2008] makes no reference whatever to the power to decrease the rate of return, other than in accordance with a formula” – in other words there was no power to retrospectively cut the rate of return. (Secretary of State for Energy and Climate Change v Friends of the Earth and Others [2012] EWCA Civ 28, para 50)

Michael Beloff QC, for DECC, submitted that the court should avoid awarding damages in cases of this sort because to do so would potentially violate the principle that damages are not awarded for maladministration. This, too, Coulson rejected. He said:

Because the interference was unlawful, the defendant is unable to justify it. If I am wrong about that, on the fair balance test, I conclude that, on the balancing exercise, taking into account everything (including the environmental impact), the defendant has not made out the necessary case on justification, notwithstanding the wide margin of appreciation. Accordingly, on either approach, I find that the interference was unjustified.”

This suggests that the interference was unlawful per se, but even if it were not, any positive effects of intervention (lower subsidies borne by consumers at large) were outweighed by losses – including (significantly) damage to the environment. The claimants were entitled to damages “to put them back in the position they would have been in had the violation not occurred”. (Para 156) The amounts will depend on looking at each individual contract.

Coulson concluded: “Although the entitlement to damages will ultimately depend on the facts, as a matter of general principle, the claimants have demonstrated an entitlement to damages assessed by reference to the loss of those possessions for which recovery is permissible, namely signed/concluded contracts and/or the marketable goodwill referable to such contracts.”

Note: The High Court originally found the Government’s actions unlawful in 2011 though not on an A1P1 basis. Mitting J took the view that the Government action was ultra vires of the Act and inconsistent with the statutory purpose. DECC went on to lose an appeal in January 2012: Secretary of State for Energy and Climate Change v Friends of the Earth and Others. Here the court held the action was ultra vires on grounds of retrospectivity.

The 2014 High Court case, as a hearing on preliminary issues, has not concluded matters between the solar panel installers and the Government, but it has laid down the legal basis so the sides can either come to agreement or test the issues on the individual facts at a future hearing.

Update DECC has lost a further stage of the legal action at the UK Supreme Court (May 2015): transcript here. The court confirmed “A possession within the meaning of A1P1 does not include a right to acquire possessions and a mere prospective loss of future income is not a possession.” However marketable goodwill may be a possession. Crucially it is based on past work building up a reputation rather than mere expectation of future profits. The judge said: “The fact that the Proposal had no legal effect (because it was no more than a proposal) does not mean that it did not affect and interfere with the claimants’ A1P1 rights. In short, I reject the submission that a mere proposal cannot, as a matter of law, amount to an interference.” In general “It will almost always be possible for the authority in question to justify the interference as being ‘in the public interest’ and subject to the conditions provided for by law” – and hence be lawful.

Update
Coulson’s approach has been upheld by the Court of Appeal which agreed that although the Huhne announcement was not in itself illegal, it was nevertheless an interference with property under the ECHR Protocol 1 art.1 (A1P1) because of the disproportionate effect it had on the companies compared with the public interest. Damages will be assessed (unless there is a further appeal) on the facts of each company’s case ie to what extent actual losses can be ascribed to the announcement rather than other business issues. The Master of the Rolls noted:

I should add that this conclusion is reinforced by the fact that very little consideration appears to have been given by DECC at the time to the impact the Proposal would have on existing businesses. The published Impact Assessment did not look at this aspect of the matter beyond a brief reference to “sunk costs, e.g. deposits of investors who are not able to complete their installations and submit their application for accreditation before 12 December” and the optimistic assertion that the new tariffs “will ensure that businesses installing domestic solar PV remain viable”.

The Court of appeal decision is here:

DECC v Bryer Group judgment – Court of Appeal (pdf)

Twitter: alrich0660

Coulson quotes
More widely, I consider that it is wrong in principle to say that a concluded, valid contract, with a clear economic value and an enforceable set of terms, cannot be an asset until its terms have been scrutinised to see what they say about termination, and then, if necessary, attempts are made to enforce the contract or sue for damages. The contract is an asset, whatever the terms relating to termination. At most those terms might have a bearing on the residual value of that contract. It is inappropriate for the defendant (who on this basis interfered with that asset) to seek to place a further burden on the claimants by requiring them to become involved in enforcement or litigation with other parties.” (Para 54)

“I have concluded that, in principle, these unsigned/incomplete contracts cannot be possessions within A1P1. Again, the first reason for that is because there is no authority for the proposition that an unsigned/incomplete contract is an asset. Secondly, an unsigned/incomplete contract would not meet the indicia of possessions as per paragraph 58 of Lewison J’s judgment in Murungaru. An unsigned/incomplete contract is not a contract at all. It is therefore intangible; it is not assignable; and it can have no present economic value.” (Para 59)

 “A possession for the purposes of A1P1 will not include a right to acquire possessions. If future income has not yet been earned, and in respect of which an effective legal claim cannot be made, it is not a possession: see Marckx v Belgium [1979] EHRR 330. This is a common theme in both the domestic and Strasbourg decisions.” (Para 63)

It was agreed that:
“The Defendant knew that it was very likely that, and intended that, those operating businesses in the area of small-scale Solar PV [photo-voltaic] electricity generation, including businesses such as those operated by the Claimants, would from the time the October 2011 Consultation was published, conduct their businesses on the assumption that the Proposal would come into effect as set out in that Consultation.” (Agreed Facts para 50)

“The Defendant knew that it was very likely that, and intended that, the publication of the Proposal would have an immediate effect on the actions of those involved in Solar PV installations such as the Claimants, in that the proposed tariff would be regarded by the vast majority of such businesses as economically unacceptable, with the consequence that they would be deterred from proceeding with Solar PV installations.” (Agreed Facts Para 51)

Note on Breyer and other firms: “Breyer operated a ‘free solar’ business model, whereby the end user would not have to pay for the installation of Solar PV and would enjoy reduced energy costs, and the FIT income generated by the installation would be assigned to a third party. Breyer would contract with social housing landlords to conduct large-scale installations on their housing stocks, for which Breyer would be paid a fee per installation.” Various other business models of 14 claimants were described including taking returns from the FIT savings over periods of up to 26 years and direct sales of solar equipment.

Goodwill
This useful definition of goodwill was relied on by the judges in the Supreme Court case:

“It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old- established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade…The goodwill of a business is one whole, and in a case like this it must be dealt with as such.” Lord Macnaghten, Commissioners of Inland Revenue v Muller and Co. Margarine Ltd [1901] AC 217 at p 22.

 

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About alrich

Journalist and blogger on legal and financial/economics issues

3 responses »

  1. What a brilliant piece! I haven’t seen this story anywhere. I’m sure you have broken a big story here

    Reply
  2. Pingback: Court win for Drax over renewable energy subsidy | Alrich Blog

  3. Pingback: Human Rights Act: Are these cases trivial? | Thinking legally

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