The Court of Appeal has recently handed down a significant judgment in the case of Charles Terence Estates Ltd (CTE) v Cornwall Council [2012] EWCA Civ 1439, which shows a further tightening of the scope for public authorities to seek to rely on their own failings in trying to avoid liabilities that they might otherwise be taken to have agreed. 

The case arose out of arrangements entered into with CTE by two of the predecessor district councils in Cornwall in the exercise of functions under the Housing Act 1985 and, in particular, the acquisition of houses or buildings under Section 17 of that Act.  The district councils had agreed to take long leases of properties which would then be made available to individuals to whom they owed housing duties.  The judge at first instance held that they had breached their fiduciary duties to the ratepayers by failing to have regard to market rents when agreeing the terms of the leases with CTE.  As a result, he considered that they had acted ultra vires and that the leases were, therefore, void. 

Although he refused any retrospective claims by the Council, he held that effectively Cornwall Council (the statutory successor to the district councils) could walk away from the leases. 

Unsurprisingly, the property owners appealed and the Court of Appeal considered a number of issues.

Breach of fiduciary duty

Firstly, was there a breach of the fiduciary duties owed by the Council to the ratepayers?  After considering the three leading cases of Roberts v Hopwood [1925] AC 578 (Poplar Council’s attempt to introduce fair wages and equality of pay for women in the 1920s), Prescott v Birmingham Corporation [1955] Ch 210 (challenging the provision of free travel for senior citizens) and Bromley LBC v Greater London Council [1983] 1 AC 768 (challenging the GLC’s approach to setting fares for London transport), the court considered that, although the Council might have been criticised for the length of term they entered into and whether they had acted with due care, this sort of error did not bring one into the territory of breach of fiduciary duty. 

The mere fact that the Council might have made a better bargain was not a justification for the court to reopen the financial arrangements entered into by the parties at the time.  As a result, the Court of Appeal held there was no breach of fiduciary duty by Cornwall Council. 

The application of public law in private disputes

However, in the light of the lower court’s views on the point, the Court of Appeal went on to consider the application of its earlier decision in Credit Suisse v Allerdale DC [1997] QB 306 (Allerdale) and the application of public law in private law disputes.  The court reiterated that where, as in Allerdale, the council were acting outside their powers in the sense that they did not have the power to do what they purported to do, then that would give rise to a defence in private law proceedings. This is sometimes referred to as a ‘pure’ vires point. 

Improper exercise of a lawful power

The court also considered the (admittedly non-binding) views of the Court of Appeal in Allerdale on the position where the public authority has acted ultra vires in circumstances where that flows from a failure to exercise its powers properly.  Conflicting views were expressed in Allerdale, but in CTE v Cornwall Council, the court unanimously preferred the approach adopted by Hobhouse LJ in Allerdale that where a decision of a public authority is being challenged in private law proceedings on the grounds of an improper exercise of a lawful power, then a closer examination of the circumstances may be necessary.  It would not be appropriate to take the absolute rule derived from the Anisminic case that if the decision was unlawful, it was therefore void as it would be in public law proceedings. 

Comment

This decision means that it will now be much more difficult to persuade a court that as a result of defects in the way in which public authorities have exercised their functions, they are entitled to avoid entirely decisions or contracts to which they are party. 

It also raises interesting questions as to the relationship between public and private law where a public body enters into private law arrangements which are potentially capable of challenge in a number of different ways.  It remains to be seen how  the courts will develop this  type of protection for third parties following this case. In local authority matters, the existence of the safe harbour provisions created by the Local Government Contracts Act 1997 may indicate one way forward, but it would be a bold step for the judiciary to effectively extend that application of that Act to  other public bodies. Alternatively, use may be made of estoppel or legitimate expectations in favour of  third parties who are acting without notice of the defect in the process.