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Judgments - Regina v. Secretary of State for Transport Ex Parte Factortame Limited and Others


Lord Slynn of Hadley Lord Nicholls of Birkenhead Lord Hoffmann
Lord hope of Craighead Lord Clyde









ON 28 OCTOBER 1999


My Lords,

    In this important case your Lordships have had the advantage, in addition to formal written cases, of most able and admirably concise oral arguments from Counsel on behalf of all parties. Those parties are, as Appellant, the Secretary of State for Transport, in effect representing the United Kingdom, and, as the Respondents, companies (or shareholders or directors of companies) and individuals who owned or managed vessels which were part of the British fishing fleet until they lost their registration on 31 March 1989 as a result of legislation, including delegated legislation, adopted in the United Kingdom. That legislation has been held by the European Court of Justice to constitute a breach of Community Law by the United Kingdom and the question on this appeal is whether the Appellant's breaches of Community Law were sufficiently serious to give rise under Community Law to a right to compensatory damages to those who can show that the breach caused them damage. Any question of causation has been left over pending a determination as to the seriousness of the breach for the purpose of Community Law.

    The Divisional Court and the Court of Appeal unanimously held that the breaches were sufficiently serious for that purpose. A claim for exemplary damages, though originally made, has not been pursued before the Court of Appeal or before your Lordships' House. It is not suggested that there is any need to make a reference to the European Court under Article 177 of the Treaty, the assessment of seriousness being for the national court (Brasserie du Pecheur SA v. Federal Republic of Germany and Reg. v. Secretary of State for Transport, Ex parte Factortame Ltd. (No. 4) (Cases C-46 and 48/93) [1996] Q.B. 404, 500, para. 58 ("Factortame III").

The main facts

    The case has a long history both on the facts and in relation to the judicial proceedings before courts in the United Kingdom and before the European Court of Justice. Those facts and proceedings are recited in detail in the judgment of the Divisional Court ([1997] Eu.L.R. 475) to which I refer. Since with one exception the findings of fact were accepted before the Court of Appeal and before your Lordships' House it is neither necessary nor useful to set them all out again. I therefore confine myself to indicating the important stages of the saga.

    From 1970 the European Community established, as part of the Common Agricultural Policy, a Fisheries Policy, pursuant to Article 38 of the E.E.C. Treaty. This arose partly out of concern for the over-fishing of stocks in the North Sea and Atlantic Ocean but also out of a desire to ensure equality for the vessels of member states in access to fishing grounds and to exclude the fishermen of non-member states from those grounds other than on terms agreed by the Community. Such an agreement was made by the Community with Spain in 1980 (i.e. before Spain's accession to the Community) giving Spanish vessels the right to fish for particular species in identified waters of the member states.

    The adoption of this policy meant that domestic rules as to fisheries had to comply with the rules of the Common Fisheries Policy and the United Kingdom on accession in 1973 became subject to those rules.

    The common fisheries policy in fact developed more slowly than the common agricultural policy but in 1980 by Council Declaration of 8 May 1980 on the Common Fisheries Policy (O.J. 1980 C 158/2) the Council set out guidelines on which the Policy was to be based. These emphasise the importance of having regard to the needs of regions where the local population was dependent on fishing, to traditional fishing activities in those regions and to the fair distribution of catches.

    By Council Regulation E.E.C. No. 170/83 (O.J. 1983 L24/1) of 25 January 1983 the Community set up a system of national quotas for "total allowable catch[es]" based in part on catches for the years 1973-1978 and it issued multi-annual guidance programmes dealing with fishing capacity and fleets.

    From 1976 Spain had conferred advantages (e.g. as to landing rights) on Spanish fishing companies which were entered on the register of another State so as to be able to fish in that State's waters, in order that those companies retained their economic links with Spain (Royal Decree 2517./1976). The United Kingdom took the view that Spanish vessels were registered on the British register so as to obtain access to United Kingdom fishing grounds in a way which went beyond what had been agreed between the Community and Spain in 1980 and that to all intents and purposes these were Spanish vessels using up the British quota. The owners of these fishing vessels (and the directors of and shareholders of companies owning vessels) were Spanish; many of the fishermen were Spanish; the catches went to Spain. Local British fishing communities accordingly derived no benefit from these activities which even when carried out on British registered vessels were essentially Spanish.

    It is hardly surprising that the British Government wished to do something to protect these British fishing communities and those vessels which were intrinsically, as opposed to merely legally, British and also to protect the British national quotas. There is no doubt that in international law and under domestic law steps could have been taken to control registration on the British register and to regulate the fishing of particular stocks. What could be done was, however, subject to Community Law and the British Government sought unsuccessfully to persuade the Commission to take steps to prevent what the United Kingdom was complaining about and which came to be referred to as "quota hopping".

    In order to deal with the substantial number of Spanish vessels which had been re-registered on the British register and of British registered boats acquired by Spanish companies and individuals, the United Kingdom enacted in March 1983 the British Fishing Boats Act 1983 and it made the British Fishing Boats Order 1983 (S.I. 1983 No. 482) which required vessels registered on the British register to have a crew of at least 75 per cent E.E.C. nationals before they could fish lawfully in British fishing grounds. That excluded the Spanish fishermen. But when Spain acceded to the Community with effect from 1 January 1986 (and thereby became subject to Community rules) the 1983 legislation ceased to achieve its objective. Pursuant to the Sea Fish (Conservation) Act 1967 new licensing conditions were therefore introduced on 1 January 1986 which required that 75 per cent of the crew must be nationals of E.E.C. States and reside ashore in the United Kingdom. All the crew had to pay United Kingdom Social Security contributions and the vessels had to show that they operated from British ports either by at least visiting the ports four times a year or by landing and selling 50 per cent by weight of landed fish in the United Kingdom. These conditions as to nationality, residence and social security contributions were held on 14 December 1989 to be contrary to Community Law (though the operating condition was held not to be unlawful) by the European Court in Reg. v. Ministry of Agriculture, Fisheries and Food, Ex parte Agegate Ltd. (Case C-3/87) [1990] 2 Q.B. 151. A challenge to the operating condition was made in Reg. v. Ministry of Agriculture, Fisheries and Food, Ex parte Jaderow Ltd (Case C-216/87) [1990] 2 Q.B. 193 the Spanish owned vessels agreed to comply with the operating condition and the United Kingdom agreed not to enforce the crew residence and national insurance contribution conditions.

    Even before the judgments in Agegate and Jaderow the Government took the view that the position was getting worse since Spanish controlled vessels were increasing their take from British quotas; British fishing communities accordingly were further disadvantaged. The way to tackle the problem was seen to be to change the rules on registration rather than on licensing. As a result the Merchant Shipping Act 1988 was enacted with effect from 1 December 1988 and the Merchant Shipping (Registration of Fishing Vessels) Regulations 1988 (S.I. 1988 No. 1926) also came into force on the same date.

    By section 14 of the Act a vessel could only be entered on the register as a British fishing vessel if it was British owned. To qualify as such the legal owners and not less than 75 per cent of the beneficial owners had to be qualified persons or companies. In addition the charterer, manager or operator of the fishing vessel had to be a qualified person. The vessel to qualify had to be managed and its operation be directed and controlled from within the United Kingdom. A "qualified person,"so far as relevant, meant

    "(a) a person who is a British citizen resident and domiciled in the United Kingdom"

A "qualified company" was defined as

    "A company which satisfies the following conditions namely -

    (a) it is incorporated in the United Kingdom and has its principal place of business there;
    (b) at least the relevant percentage of its shares (taken as a whole) and of each class of its shares, is legally and beneficially owned by one or more qualified persons or companies; and
    (c) at least the relevant percentage of its directors are qualified persons."

Section 14 further provided in sub-section 4 that where, in the case of any fishing vessel, the Secretary of State was satisfied that the vessel could not be registered as a British fishing vessel because the individuals were not British citizens, but that it would be appropriate to dispense with the requirement of British citizenship in the case of that individual in view of the length of time he had resided in the United Kingdom and been involved in the fishing industry of the United Kingdom, the Secretary of State might dispense with the nationality requirements.

    Questions as to the legality under Community Law of these conditions was referred to the European Court of Justice under Article 177 of the Treaty in March 1989 by the Divisional Court. On 18 May 1989 your Lordships' House referred the further question as to whether under Community Law English courts were required to have the power to grant interim protection for rights claimed under Community Law, a question answered in the affirmative by the European Court on 19 June 1990 in its judgment in Reg. v. Secretary of State for Transport, Ex parte Factortame Ltd. (Case C-213/89) [1990] E.C.R. I-2433 ("Factortame I").

    On 7 August 1989 the Commission began proceedings under Article 169 of the Treaty against the United Kingdom contending that the nationality condition was in breach of articles 7, 52, 59 and 221 of the Treaty and applying for interim measures to require that condition not to be applied pending the decision in the main proceedings.

    On 10 October 1989 the President of the European Court made an order for interim measures in the Article 169 proceedings pending judgment in those proceedings. His order was that:

    "the United Kingdom shall suspend the application of the nationality requirements laid down in section 14(1)(a) and (c) of the Merchant Shipping Act 1988 read in conjunction with [sub-sections] (2) and (7) of that sections, as regards the nationals of other Member States and in respect of fishing vessels which, until 31 March 1989, were pursuing a fishing activity under the British flag and under a British fishing licence."

This Order was given effect to by the Merchant Shipping Act 1980 (Amendment) Order 1989 (S.I. 1989/No. 2006) which came into force on 2 November 1989. This was limited to the nationality condition. By a letter before action of 13 June 1990 pursuant to article 169 the Commission added its objection both to the domicile and to the residence conditions.

    In Reg. v. Secretary of State for Transport, Ex parte Factortame Ltd. (No. 3) (Case C-221/89) [1992] Q.B. 680 ("Factortame II"), the European Court on 25 July 1991 held that although member states could determine in accordance with the rules of international law the conditions for the registration of vessels on their register and the right to fly their flag they still had to comply with Community law. The Court further held that the requirement of nationality, residence and domicile for legal and beneficial owners, charterers, and managers and operators of fishing vessels registered on a member state's register were contrary to Community Law and in particular to article 52 of the Treaty, although articles 5,7, and 221 thereof were also breached. They held that the power to dispense with the nationality requirement on the grounds of a period of residence did not justify the requirements of nationality, residence or domicile. Nor were such requirements justified by the fact that the Common Fisheries Policy provided for national quotas to be fixed. On the other hand they held that the requirement that the vessel be managed and its operations directed and controlled from within a member state was not contrary to Community law.

    That was not, however, sufficient redress for the Respondents. They had already claimed that they had suffered financial loss caused directly by the United Kingdom's breach of Community Law in adopting and applying the Merchant Shipping Act 1988 on the basis of Francovich v. Italian Republic (Cases C-6/90 and C-9/90) [1991] E.C.R. 5357. Their entitlement to compensation was now the issue. The Divisional Court referred to the European Court first the question whether when the three conditions to which I have referred had been laid down by primary legislation and had been held to infringe articles 5, 7, 52 and 221 of the E.C. Treaty, the owners or managers of such vessels or directors and shareholders in vessel-owning and managing companies were entitled to compensation as a matter of Community Law for the losses suffered as a result of the breaches of the Treaty. Second, the court asked, if they were entitled, what considerations the national court should apply in determining the claims for damage relating to

    "(a) expenses and/or loss of profit and/or loss of income during the period subsequent to the entry into force of the said conditions, during which the vessels were forced to lay up, to make alternative arrangements for fishing and/or seek registration elsewhere".

In its judgment of 5 March 1996 in Factortame III (cases C-46/93 and C-48/93) [1996] Q.B. 404, 506 the European Court replied:-

    "1. The principle that Member States are obliged to make good damage caused to individuals by breaches of Community Law attributable to the State is applicable where the national legislature was responsible for the breach in question.

    2. Where a breach of Community Law by a Member State is attributable to the national legislature acting in a field in which it has a wide discretion to make legislative choices, individuals suffering loss or injury thereby are entitled to reparation where the rule of Community Law breached is intended to confer rights upon them, the breach is sufficiently serious and there is a direct causal or link between the breach and the damage sustained by the individuals. …"

    It was accepted by the appellant that the relevant rules of Community Law were intended to confer rights on individuals and, as I have already said, the question of causation it was agreed should be left over. But it is said that the United Kingdom's breach or breaches were "sufficiently serious" to entitle the Respondents to compensation for the damage suffered which it is said is substantial.

The Divisional Court

    In addition to the fundamental importance of the principal breach (as held by the European Court of Justice in "Factortame II") the Divisional Court regarded as serious the fact that discrimination on the ground of nationality was the intended effect of the domicile and residence conditions, that the Secretary of State was aware that the imposition of the conditions must necessarily injure the applicants because the conditions were intended to ensure that the applicants would no longer fish against the British quota, that the attitude of the Commission was hostile and that the Government decided to adopt the conditions by primary legislation, the consequence of which was that under domestic law the applicants could not get interim relief. The Divisional Court added [1997] Eu.L.R. 475, 518:-

    "In any event, the applicants were deprived of the opportunity of being able to prevent damage being caused to them and it is clear that they did everything possible in order to try to avoid such damage (see para. 120 of the opinion of Advocate-General Tesauro in Factortame III). The situation was aggravated because, at least arguably, the measures adopted infringed the principles of proportionality and legitimate expectation, both of which are superior principles of Community law. Other methods could have been chosen which would have enabled applications for interim relief to be considered on their merits by the national court. The applicants had been carrying on lawful businesses and were forbidden to continue them. In these circumstances, it would be difficult to resist the argument that they should have been afforded a reasonable opportunity to take measures to avoid any serious damage which would otherwise ensue."

The Court concluded that the appellants' breaches of Community Law including the breach in complying with the President's Order of 10 October 1989 was sufficiently serious to give rise to liability for any damage that might subsequently be shown to have been caused by the appellant to the respondents.

The Court of Appeal

    The Court of Appeal [1998] Eu.L.R.456, 475 was of the opinion that the seriousness of the breach "has to be judged objectively taking into account all the relevant circumstances [including] the circumstances identified by the European Court of Justice in Factortame III.

    They said, at p. 476:

    "In a case in which the legislative discretion of a Member State is involved, as here, so as to avoid an excessive chilling factor defeating that discretion, a basket or global approach, involving weighing the relevant considerations is the required approach. Nonetheless, where what is relied on in support of an application for damages is a direct breach of the fundamental principle of the Treaty forbidding discrimination on grounds of nationality that will almost inevitably create a liability for damages. Whether intentional or not, such a breach is inexcusable in a case, such as this, where it is not suggested that the exceptions in Arts 55 and 56 which apply to the right of establishment granted by Art. 52 have any relevance. . . .

    Our decision as to the nationality condition means that there is a liability to pay damages during the period from the coming into force of the 1988 Act until 2 November 1989 when it ceased to have effect for most purposes. For this period we see no cause to distinguish between the three conditions. They are cumulative and it would be artificial to distinguish between them.

    However, any damage to the applicants was in most cases caused solely by the domicile and nationality conditions. In the course of the hearing before us the Solicitor General did not seek to disturb the finding of the Divisional Court that the domicile condition is to be equated with the nationality condition. It seems to be implicit in that concession that if, as we find, there ought to be a remedy in damages in relation to the nationality condition while it was in force there ought equally to be a remedy in relation to the domicile condition while it was in force — namely throughout the period ending with the granting of the interim injunction by the House of Lords."

As to the residence condition standing alone (which was relevant to applicants who satisfied the nationality and domicile conditions) the Court of Appeal said at pp. 476-477:

    "We have already pointed out that in this case it is artificial to isolate the conditions as to residence for separate treatment because the conditions were cumulative. In addition during the second period, when as a result of the President's decision, nationality was no longer relevant, the Secretary of State is faced with the difficulty that he had not regarded a requirement as to residence by itself as providing the necessary protection. This makes it difficult to justify the more limited requirement of residence by the need to protect the C.F.P. If the Secretary of State did not regard a condition of residence as capable of combating the problem it can hardly be justifiable as being necessary for that purpose. The Divisional Court pointed out the residence condition was intended to achieve, by an indirect method, the same result as was intended to be achieved by the nationality condition. The Divisional Court stated, 'accordingly we can see no difference in principle between a breach of Article 52 created by the residence condition and one created by the nationality condition' (at p.516E). . .

    Having balanced the conflicting considerations we share the view of the Divisional Court that the indirect discrimination, which the requirement of residence involved, must, at least by 31 March 1989, be regarded as constituting a sufficiently serious breach for the purposes of attracting an entitlement to damages."

    Both the Divisional Court and the Court of Appeal expressed concern about the way that the 84th applicant, Rawlings (Trawlers) Limited (one of whose shareholders and directors, Mr. Yllera, was a Spanish national) had been treated on its application for a dispensation under section 14(4) of the Act in view of his integration in the British fishing industry. They also expressed similar concern about the way in which the 85th to 97th applicants (Mr. and Mrs. O'Connor and their companies other than management companies) had been treated. He was an Irish national and his wife a Belgian national. They therefore failed on nationality, but, having been resident in the United Kingdom and having worked with the British fishing fleet since 1978, they applied for, but were refused, a dispensation under section 14(4) of the Act of 1988. The Divisional Court thought the policy uncertain and confused and inconsistently applied. The Court of Appeal regarded this treatment as adding to the seriousness of the breach, which was however established sufficiently without reliance on the way they had been treated on their application for a dispensation and the nationality condition.

The grounds of appeal

    On this appeal the Solicitor-General accepts that since "domicile" in the Act was intended to have its meaning in English law as residence with an intention permanently to reside (and not merely residence with a substantial connection with the United Kingdom), it is to be treated in the same way as the nationality requirement and not in the same way as the residence requirement He was in my opinion right to take that view since domicile in the intended sense was at least as restrictive and discriminatory as the nationality requirement. He also accepts that the failure to give effect to the President's Order of 10 October 1989 until 2 November 1989 was itself a sufficiently serious breach to entitle at any rate the respondents resident here (but not satisfying the nationality test, in particular Rawlings) to compensation for the period of delay. This was in line with the view of the Divisional Court based in part on the statement by the European Court of Justice (Factortame III [1996] Q.B. 404, 464, para. 64) that if the United Kingdom failed to adopt immediately the measures needed to comply with the President's Order of 10 October 1989 this "should therefore be regarded by the national court as constituting in itself a manifest and, therefore, sufficiently serious breach of Community law".

    I agree with the Divisional Court that the President's Order took immediate effect and that, therefore, to refuse Rawlings' application for registration on the day following the President's Order, on the basis that legislation by Order in Council was needed, or at any rate was to be awaited, before the President's Order could be put into effect was a breach in itself, and on the basis of the European Court's judgment was a sufficiently serious breach. I consider therefore that the Solicitor-General was right also to accept that result.

    The appellant contends, however, that the Divisional Court and the Court of Appeal were wrong in their conclusions that there had been a sufficiently serious breach of Community law. In summary it is said that here the United Kingdom was adopting legislation to deal with a serious economic problem. In deciding what to do it had a wide measure of discretion and damages can only be awarded if there is a manifest and grave disregard of its powers; to impose liability otherwise would be to inhibit legislative action which was necessary. Even where there is a breach of Community law there can be no liability to compensate where the breach was excusable. Here the breach was excusable since the law was not clear until the judgment in Factortame II [1992] Q.B. 680 and there were substantial objective grounds to justify what was done when regard is had both to the existence of the common fisheries policy, which is intended to provide national quotas which member states are entitled to protect, and to a state's rights under international law to decide who should be entitled to register a vessel on its register and to fly its national flag. Moreover other member states adopted the same approach as the United Kingdom, the courts here regarded the issue as difficult (as in the judgments preceding Factortame I in the European Court) and the Government obtained and relied on independent legal advice that what they proposed to do would be accepted under Community law. Even if the action was discriminatory it could still in law, and was here, excusable. The United Kingdom was not bound to follow the opinion of the Commission and its action cannot be said to be a sufficiently serious breach merely because the Commission took the view that what was done was a breach of Community law. Moreover the United Kingdom was not deliberately setting out either to breach Community law or to injure the respondents and throughout it acted in good faith even if its clear intention was to prevent foreign owners, and particularly Spanish owners, from using the device of having or registering their vessels on the British register in order to fish against the British quota and thereby to take the fishing away from local British fishing communities and to send the fish to Spain. Even if the breach caused by the nationality condition was sufficiently serious, it is said that the breach consisting of the residence condition was not.

Liability to compensate-the principle