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

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    My Lords in Frankovich (supra), a case where there had been a failure to implement a directive, the European Court said at paragraph 37 "it is a principle of Community law that the member states are obliged to make good loss and damage caused to individuals by breaches of Community law for which they can be held responsible". The court did not indicate what were the conditions for such liability or what if any defences would be available to a member state in breach of Community law obligations, save that in the case of a directive liability was conditional on there being a grant of rights to individuals by the directive, that the contents of those rights were clear, and that the loss suffered was shown to be caused by the state's breach. The further scope of the remedy was left to be worked out in subsequent cases as it has been in Factortame III.

    The European Court has made it clear that, in deciding whether a state should be held liable, regard should be had to the principles laid down by the Court of Justice in deciding whether the Community itself would be held liable "in accordance with the general principles common to the laws of the Member States, [to] make good any damage caused by its institutions" (article 215). In Factortame III para. 42 the Court said, "the conditions [for state liability] cannot, in the absence of particular justification, differ from those governing the liability of the Community in like circumstances. The protection of the rights which individuals derive from Community law cannot vary depending on whether a national authority or a Community authority is responsible for the damage".

    The basic approach is clear. Before a member state can be held liable, a national court must find (i) that the relevant rule of Community law is one which is intended to confer rights on individuals; (ii) the breach must be sufficiently serious; (iii) there must be a direct causal link between the breach and the loss or damage complained of. That condition (i) is satisfied is rightly accepted by the Appellants; (iii) is deferred if the Respondents succeed on (ii). The question, therefore, is what constitutes being "sufficiently serious" and whether the Divisional Court and the Court of Appeal were right to hold that the breaches here were sufficiently serious. It has in this regard particularly to be borne in mind that what is attacked in the first place here is a state's decision to adopt legislation, though in the second place the respondents complain about the way in which the legislation was applied.

    In view of the court's judgment in Factortame III it is not necessary to examine in detail the earlier judgments of the Court of Justice under article 215 but reference should be made to Bayerische HNL Vermehrungsbetriebe G.m.b.H & Co. K.G. v. Council and Commission of the European Communities (Joined Cases 83 and 94/76 and 4, 15 and 40/77) [1978] E.C.R. 1209, Ireks-Arkady G.m.b.H. v. Council and Commission of the European Communities (Case 238/78) [1979] E.C.R. 2955 and Mulder v. Council and Commission of the European Communities (Joined Cases C-104/89 and C-37-90) [1992] E.C.R. I-3061 .

    In Bayerische the Court stressed at p. 1224 that the fact that Community legislation is null and void does not entitle an individual to compensation where choices of economic policy are involved - it is only where there has been "a sufficiently serious breach of a superior rule of law for the protection of the individual"; "public authorities can only exceptionally and in special circumstances incur liability for legislative measures which are the result of choices of economic policy"; "the Community does not therefore incur liability unless the institution concerned has manifestly and gravely disregarded the limits on the exercise of its powers."

     In Ireks-Arkady the Court in adopting what had been said in Bayerische said, at p. 2973, para. 11 that the prohibition in article 40(3) of the E.E.C. Treaty of discrimination in the common organisation of the agricultural markets "occupies a particularly important place among the rules of Community law intended to protect the interests of the individual". In that case a limited and clearly defined group of commercial operators was affected and the damage alleged "goes beyond the bounds of the economic risks inherent in the activities of the sector concerned" (paragraph 11). In Mulder v. Council and Commission of the European Communities the Advocate-General analysed the court's approach in the earlier cases. He said [1992] E.C.R. I-3061, 3103:

    "15. In my view, it appears from this wording - although a clear pronouncement is warranted - that the expression 'manifestly and gravely disregarded the limits on the exercise of its powers' qualifies the words 'a sufficiently serious breach'. It indicates more specifically that in the case of legislative measures carried out pursuant to a broad discretion the public authority is allowed a certain margin of error. Only where the public authority's error is inexcusable, that is to say where it could reasonably not have committed it, have powers been manifestly and gravely disregarded and there therefore has been a sufficiently serious breach (of a superior rule of law for the protection of individuals).

    16. The Court's case-law fleshes out the criterion 'manifest and grave disregard of the limits on powers'and therefore also the requirement for there to have been a 'sufficiently serious breach'. It appears from the case-law that that criterion is made up of two components: on the one hand, a component related to the type and seriousness of the breach, in other words related to unlawfulness; on the other, a component relating to the type of the damage caused thereby. More specifically, in the judgments of 4 October 1979 in the Quellmehl and Maize Gritz cases, the Court invoked the following circumstances in deciding that the Council had manifestly and gravely disregarded the limits on its powers through the exercise of a wide discretionary power essential for the implementation of the common agricultural policy: (i) the particular importance of the principle infringed by the regulation (in those cases, the principle of equality) and hence the (objective) seriousness of the breach; (ii) the fact that the disregard of that principle affected a limited and clearly defined group of commercial operators; (iii) the fact that the damage alleged by the applicants went beyond the bounds of the economic risks inherent in the operators' activities in the sector concerned; (iv) the fact that the principle in question was infringed without sufficient justification (which points to the inexcusable nature of the error made by the authority: (see section 15 above).

    Accordingly, the circumstances which, according to that line of cases, point to the existence of a manifest, grave disregard of the limits of a discretionary power or of a sufficiently serious breach of a superior rule of law (which means the same thing) include both circumstances relating to the serious (i) and unjustifiable or inexcusable (iv) nature of the breach, which are thus concerned more specifically with the unlawful nature of the act, and circumstances relating to the group adversely affected (ii) and to whether or not the adverse effect exceeded a normal risk (iii), which therefore are concerned more specifically with the damage caused by the act."

    In Factortame III the court repeated these principles and said [1996] Q.B. 404, 498, para. 43:

    "The system of rules which the court has worked out with regard to Article 215 of the Treaty, particularly in relation to liability for legislative measures, takes into account, inter alia, the complexity of the situations to be regulated, difficulties in the application or interpretation of the texts and, more particularly, the margin of discretion available to the author of the act in question."

    The strict approach towards the liability of the Community in the exercise of legislative functions was due in part to the need not to hinder legislative action, "whenever the general interests of the Community requires legislative measures to be adopted which may adversely affect individual interests."

    It was also in part due to the rule that the Community can only be liable where it has gravely and manifestly disregarded the limits on the exercise of its power. A national legislature may be required to achieve a particular result when it does not have a wide discretion but if it does have a wide discretion the same approach must be followed as with Community institutions.

    Accordingly, at p. 499:

    "55. As to the second condition, as regards to both Community liability under Article 215 and Member State liability for breaches of Community law, the decisive test for finding that a breach of Community law is sufficiently serious is whether the Member State or the Community institution concerned manifestly and gravely disregarded the limits on its discretion.

    "56. The factors which the competent court may take into consideration include the clarity and precision of the rule breached; the measure of discretion left by the rule to a national or Community authorities; whether the infringement and the damage caused was intentional or involuntary; whether any error of law was excusable or inexcusable; the fact that the position taken by a Community institution may have contributed towards the omission, and the adoption or retention of national measures or practices contrary to Community law."

    More recent cases show the working out of these rules. Thus in . Reg. v. H.M. Treasury, Ex parte British Telecommunications Plc. (Case C-392-93) [1996] Q.B. 615 the Court held that where the interpretation adopted by the United Kingdom was arguable on the basis of an imprecisely worded article of the relevant directive and where there was no case law to give guidance the state was not liable in damages. In Reg. v. Ministry of Agriculture, Fisheries and Food, Ex parte Hedley Lomas (Ireland) Ltd. (Case C-5/94) [1997] Q.B. 139 where there was no or very little room for discretion in granting a licence that could in itself be a sufficiently serious breach. In Dillenkofer v. Federal Republic of Germany (Case C-178/94) [1997] Q.B. 259 it was held that a failure to implement a directive, where no or little question of legislative choice was involved, the mere infringement may constitute a sufficiently serious breach. In Denkavit Internationaal B.V. v. Bundesamt für Finanzen (Cases C-283/94) [1996] E.C.R. I-5063 the Court held that other member states, after discussion with the Council had adopted the same interpretation of the Directive as Germany and as there was no relevant case law of the Court it was held that the breach was not sufficiently serious.

    It was also clear from the cases that it is not necessary to establish fault or negligence on the part of the member state going beyond what is relevant to show a sufficiently serious breach.

Application of the principle in this case

    In the present case the United Kingdom was entitled to consider how it would exercise the margin of discretion left to it under Community law in the application of the Common Fisheries Policy and in particular of the quota system and also, subject to those limits, how it would exercise its rights under international law to provide for registration as a British fishing vessel. Although the three conditions (nationality, domicile, residence) held in Factortame II [1992] Q.B. 680 to be a breach of the Treaty taken in conjunction reflect what the British Government was seeking to do, for the purposes of liability to compensate, the conditions have been considered separately. The first question is, therefore, whether in imposing a nationality requirement the United Kingdom committed a sufficiently serious breach in that it had manifestly and gravely disregarded the limits of its discretion.

    In the first place it is to be noted that the relevant rule of Community law is not to be found in an ambiguous directive but in a clear and fundamental provision of the Treaty. By Article 7 it is provided that "within the scope of application of this Treaty and without prejudice to any special provision contained therein, any discrimination on the grounds of nationality shall be prohibited". The importance of this principle in the present context is underlined in Article 40(3) of the E.E.C. Treaty since any common organisation of the market set up under Article 39 "shall exclude any discrimination between producers and consumers within the community".

    It is obvious that what was done here by the Government was not done inadvertently. It was done after anxious consideration and after taking legal advice. I accept that it was done in good faith and with the intention of protecting British fishing communities rather than with the deliberate intention of harming Spanish fishermen and those non-British citizens with financial stakes in British registered fishing vessels. The inevitable result of the policy adopted, however, was to take away or seriously affect their rights to fish against the British quota.

    The nationality condition was obviously discriminatory and in breach of Article 52 as Factortame II [1992] Q.B. 680 decided. Indeed as far as Article 52 was concerned, this was already clear from Commission of the European Communities v. Italian Republic (Case 63/86) [1988] E.C.R. 29. Although the question whether this was a sufficiently serious breach justifying the award of damages is a matter for the national courts, and therefore for your Lordships, to decide it is to be noted that in Factortame III [1996] Q.B. 404, 500, para. 61 the European Court stated bluntly that the nationality condition constituted direct discrimination which was manifestly contrary to Community law.

    Can it be said that, even if the Act was deliberately adopted, it was an unintentional and "excusable" breach which should prevent what was done being "a sufficiently serious breach" in that it was a manifest and grave disregard of the limits of the United Kingdom's discretion?

    The appellant relies on the history of the discussions leading up to the enactment of the Act of 1988 and the making of regulations under it. He explains the problem and the understandable aim of seeking to protect British fishing communities and the British quota. Licensing rules having not been adequate, the only solution they felt was to change the rules on registration by primary legislation (letter Ministry of Agriculture Fisheries and Food to Foreign Secretary on 14 November 1986). They were, however, aware from the beginning of the legal problems involved. A memorandum sent to the Law Officers on 2 December 1986 which is set out more fully in the judgment of the Divisional Court [1997] Eu.L.R. 475, 490 asks for advice and recognises that "The proposed legislation (and the parallel legislation in other Member States) may contravene Article 52".

    Officials and ministers were clearly aware that there was a risk that if the legislation was adopted it would be held to be contrary to Community law. (See letter of Margaret Lind Smith of 17 July 1987 and of Mr. Ingram of 6 October 1987.) The Secretary of State for Transport wrote to the Attorney-General on 22 October 1987

    "Officials have … concluded that we should proceed as originally intended. While this does pose a risk to our position on damages, the official view was that the applicant would have to overcome so many obstacles - not least of which would be winning his case in the European Court on the substantive issue on whether our law is compatible with the Treaty - that the risk was worth taking given the drawbacks of the alternatives."

    Professor Francis Jacobs, Q.C., and other Counsel were asked to advise on the basis that a national condition of registration could be challenged before the European Court and that Articles 52, 59 and 221 of the Treaty posed a particular difficulty. The Government said that nationality was a more appropriate test than residence.

    "Not only may residence be changed more readily than nationality; it is less easy to prove or disprove. In particular, in the case of a shareholder or director of a small fishing company who may spend much of his time on a fishing boat at sea a residence test would be hard to apply"

Counsel advised on 24 February 1987 that

    "in our view, any discrimination that arises out of the proposed measures is a natural consequence of the common C.F.P. itself which divides out the available fishing quotas along national lines … .We consider that rules on the nationality of fishing vessels are the most appropriate way of establishing a genuine link between the Member States and the vessel intending to fish for the Member State's quota, particularly having regard to possible alternatives."

They recommended, however, that the percentage of shares held legally and beneficially by British nationals resident and domiciled in the United Kingdom should be no more than 75 per cent, that there should be a period of grace before the legislation took effect and they stressed that the dispensation provisions in section 14(4) of the Act of 1988 in respect of nationality where there had been a long period of residence were important. They concluded however:

    "In our view the proposed legislation should, if challenged, be held to be compatible with Community law on the basis that such legislation is a necessary consequence of the Common Fisheries Policy."

On 31 March 1987 the Law Officers advised:

    ". . . that there is a reasonably good prospect that the proposed legislation would be upheld by the European Court."

On 18 November 1988 Mr. Advocate-General Mischo gave his opinion (a) in Jaderow (Case C-216/87) [1989] E.C.R. 4509, 4525, para. 7 that:

    "Community law does not therefore restrict the power which each Member State has under public international law to determine the conditions on which it allows a vessel to fly its flag."

and (b) in Agegate (Case C-3-87) [1989] E.C.R. 4459 that the residence requirement in the crewing condition in the Act of 1983 was compatible with Community law because of the quota system and other features of the fisheries regulation.

    On the other hand it is to be remembered that the power of member states in this area is subject to the extensive control exercised by the Community institutions under the common fisheries policy. On 28 March 1988, before the bill received the Royal assent the Commission (D.G. XV) told the United Kingdom Government that the proposed conditions were prima facie contrary to the right of establishment under Article 52. The Commission continued to state its opposition to the nationality condition and subsequently to the domicile and residence conditions. The Article 169 proceedings against the United Kingdom in respect of the nationality condition, led to the President's Order of 10 October 1998 as an interim measure suspending that condition. Moreover it is to be recalled that the Divisional Court had initially suspended all three conditions [1989] 2 C.M.L.R. 353 as the House of Lords was to do on 10 July 1989 following Factortame I: [1991] A.C. 603. The decisions of the European Court in Agegate [1990] 2 Q.B. 151 and Jaderow [1990] 2 Q.B. 193 gave the government no comfort or encouragement.

    It was, moreover, obvious as the Divisional Court [1989] 2 C.M.L.R. 353 and the Court of Appeal [1989] 2 C.M.L.R. 392 thought on the initial hearing in 1988, and as the House of Lords [1990] 2 A.C. 85 thought on the hearing following Factortame I (Case C-213/89) [1990] E.C.R. I-2433 that the damage which would be suffered by the respondents would be serious and immediate

    How far the views of the Commission ought to be taken into account has been much debated in argument. The Divisional Court said [1997] Eu.L.R. 475, 519:

    "Where there is a doubt about the legality of any proposal, a failure by a Member State to seek the views of the Commission or, if it receives them, to follow them is likely to lead to any breach being regarded as inexcusable and so manifest."

The Court of Appeal added [1998] Eu.L.R. 456, 475:

    "If a Member State [proceeds on its course despite the opinion of the Commission] and it subsequently transpires that this was a course which should not have been followed, the fact that the Commission's advice has not been followed, strengthens the case of those who seek damages for the loss that they have suffered."

The appellant contends that the Court of Appeal and the Divisional Court have overstated the importance of the Commission's role.

    It is in my view clear that the views of the Commission are not conclusive (a) as to whether there has been a breach of Community law and (b) as to whether the breach is a sufficiently serious breach to justify an award of damages. The former is as a last resort for the European Court in proceedings under article 169 or on a reference under article 177 and the latter is for the national court. The considered view of the Commission in a case of this kind, where the Community has a substantial role, is however of importance. Indeed in an area so closely subject to community control as is the common fisheries policy, it is not only wise but often a necessary step to consult the Commission. The Government did here consult the Commission. A member state may choose to ignore the advice given but if it does so, it incurs the risk that, if it proves to be wrong and the Commission to be right, the member state will be found to have gone ahead deliberately, well aware of the Commission's views, and that a court will be more likely to find that the breach has been manifest and grave and thus sufficiently serious. In the present case, the Commission's view was firm, consistent and hostile to the Government.

    It seems to me that the appellant can rely on the fact that it took legal advice although that is but one factor in having regard, as I think one must, to all the circumstances. However, the advice of Professor Jacobs Q.C. and others in 1987 was to some extent qualified and was based on the instructions that there would be a dispensing power not just for the residence but also for the nationality and domicile conditions. Moreover as time went on, there was clearly doubt as to whether the Government could really succeed before the European Court and the Commission's letters, to which I have referred, were not it seems the subject matter of any further discussion with counsel. Further, the subsequent opinion of Mr. Christopher Bellamy Q.C., although on a different question, was more qualified as to the overall chances of success.

    The shortness of the transitional period, the fact that there was, it seemed, no way in domestic law of challenging the statute, and that the respondents were obliged, not merely to avoid being removed from the old register, but to apply to be put on the new register all emphasise the determination of the Government to press ahead with this scheme despite the strong opposition of the Commission and the doubts of some of its officials. When the judgments in Agegate and Jaderow ([1990] 2 Q.B. 151 and 193) were delivered they gave the Government no encouragement to continue and the view of some government officials (e.g. Mr. Timothy Pratt on 14 December 1989 which in retrospect seemed prophetic) and the opinion of Andrew Macnab of counsel on the 16 March 1990 made the difficulties more clear. There is indeed, in my view, considerable justification for the Divisional Court's finding that by January 1990 there was really little hope of saving the three conditions.

    Accordingly, despite the arguments of the United Kingdom and the advice it received, it seems to me clear that the deliberate adoption of legislation which was clearly discriminatory on the ground of nationality and which inevitably violated article 52 of the Treaty (since it prevented establishment in the United Kingdom) was a manifest breach of fundamental treaty obligations. It was a grave breach of the treaty both intrinsically and as regards the consequences it was bound, or at the least was most likely, to have on the respondents. It has not been shown to have been excusable. The Commission opposed it and despite the view of Mr. Advocate-General Mischo, on the 1983 Act there was no decision of the European Court to support the Government. What was done, therefore, in regard to nationality plainly constituted a sufficiently serious breach for the purposes of the second condition of liability. Moreover to maintain the legislation in operation after the court's decisions in Agegate and Jaderow and to allow such a short transitional period itself constituted a sufficiently serious breach.

    It is agreed that "domicile" falls to be treated in the same way as nationality. That condition, therefore, was also a sufficiently serious breach.

    As to residence, the European Court said [1996] Q.B. 404, 500:

    "62. The latter conditions are prima facie incompatible with article 52 of the treaty in particular, but the United Kingdom sought to justify them in terms of the objectives of the common fisheries policy. In the judgment in Reg. v. Secretary of State for Transport, Ex parte Factortame Ltd. (Case C-221/89) No. 3 [1992] Q.B. 680 the court rejected that justification.

    "63. In order to determine whether the breach of article 52 thus committed by the United Kingdom was sufficiently serious, the National Court might take into account, inter alia, the legal disputes relating to particular features of the common fisheries policy, the attitude of the Commission, which made its position known to the United Kingdom in good time, and the assessments as to the state of certainty of community law made by the National Courts in the interim proceedings brought by individuals affected by the Merchant Shipping Act."

I have had some doubt about the condition as to residence. If the aim of protecting the livelihood of British fishing communities, including allied trades such as preparing and processing landed fish, is justified then it is arguable that to require active fishermen to live in these communities might be excusable. The condition here was not however, limited to such fishermen or to such areas. It covered shareholders and directors of companies owning fishing vessels. It allowed the fishermen to live anywhere. It seems to me that this condition cannot be justified where the discrimination is, as it is here, clear. Moreover the British Government all along took the view that the residence condition would not it itself be sufficient to achieve its aims and so taken separately cannot in my view be justified.

    It is, moreover, somewhat artificial to separate out the various conditions and in the end I agree with the Court of Appeal that the conditions should be treated as cumulative. Even taken separately, it is clear that discrimination on grounds such as residence can constitute indirect or covert discrimination on the grounds of nationality Sotgiu v. Deutsche Bundespost (Case 152/73) [1974] E.C.R. 153. I accordingly consider that the residence condition also constituted a serious breach.

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