American comedian Bob Newhart (famous for his monologue sketches) imagined Sir Walter Raleigh as a salesman phoning base about his discovery of tobacco. The response to Sir Walter was not, however, encouraging: ‘I think you’re gonna have rather a tough time selling people on sticking burning leaves in their mouths… Listen, Walt… don’t call us… we’ll call you!’

Walt’s ‘head office’ might be similarly incredulous that a public authority can rely on its own unlawful behaviour in a public law court. But it can do just that - up to a point at least. In the leading local authority vires case of Credit Suisse v Allerdale Borough Council [1996] 4 All ER 129, while the council escaped liability for a £6m guarantee to Credit Suisse by successfully pleading its own unlawfulness in structuring a timeshare and leisure pool complex development to avoid prescribed expenditure controls, the authority did not escape some judicial disapproval. As Peter Gibson LJ remarked: ‘It is an unattractive feature of the case of Allerdale Borough Council… that it is seeking to assert the illegality of its own action in entering into the contract of guarantee in order to resist the claim of Credit Suisse… to enforce the ­guarantee.’

This sentiment was echoed on 7 October by Cranston J in Charles Terence Estates Ltd v Cornwall Council and another [2011] EWHC 2542, when the new Cornwall Council sought to escape from ‘inherited’ leasehold liabilities by contending the unlawfulness of the arrangements (among other things) for public law error. Cranston J said: ‘It is unattractive, to say the least, that a public body should raise its own unlawful actions to defend a claim made against it under an agreement it has entered. It has access to legal and financial advice, albeit that it may need to consult externally.’

However, once again (although ­various limbs of the council’s own public law submissions failed - that is, despite pleading its unlawfulness in those areas, it was in fact found to have acted lawfully in relation to them!) the decisions of the predecessor authorities (Penwith and Restormel) were struck down for breach of fiduciary duty. This is the trustee-type duty owed by local and other public authorities in respect of the proper stewardship of public monies.

In 2006 and 2007, Restormel and Penwith councils had (in line with government policy) leased some 30 properties from the claimant, Charles Terence Estates (CTE), under schemes designed to accommodate those in housing need. Central government guidance had framed this approach as conditional on housing authorities securing ‘cost-effective’ arrangements with landlords. CTE had purchased the properties in question for this purpose using £8m of bank borrowing (personally guaranteed by CTE directors) and grants and loans from the councils of £1m. However, from 1 April 2009 district councils in Cornwall were abolished and replaced by Cornwall Council as a new unitary authority which succeeded to the rights and liabilities of the former ­constituent districts (including Restormel and Penwith). On reviewing the leasehold schemes in question, Cornwall Council ceased paying rent for the properties in question and demanded immediate repayment of the grants and loans. CTE issued ­proceedings for unpaid rents in which Cornwall Council contended that the leases were flawed at the outset for error in both private and public law.

Common mistake

The private law ground (framed on the doctrine of common mistake) failed since key ingredients of that doctrine (as summarised by Lord Phillips MR in the Court of Appeal in Great Peace Shipping Ltd v Tsavliris Salvage Ltd [2002] EWCA Civ 1407) were absent. These include common assumption as to the existence of a state of affairs. In this case, the submission (among others) that both parties entered the arrangements under the mistaken belief that the leases in question were not required to be administered through the councils’ housing revenue account (HRA) was not made out. CTE had made no assumption regarding the HRA and if ‘there was any mistake it was attributable to the fault of the councils, who ought to have known about HRA requirements’. So common mistake could not be relied upon by Cornwall to avoid the contract.

Fiduciary duty

But as mentioned, the fiduciary duty challenge had more success. Cranston J had, as mentioned, noted his distaste at public bodies escaping liability by pleading their own unlawfulness. For especially ‘in these days of public bodies contracting-out services to small businesses and charities, it seems especially important to protect agreements which the latter make in good faith with them’. And the ‘party best placed to guarantee lawful action and procedural propriety is the public body itself’.

The other side of the coin though is ‘the important legal policy of ensuring that public bodies act lawfully and are called to account if they fail to do so’. So (following Credit Suisse v Allerdale Borough Council) Cranston J considered that a public authority could invoke its lack of capacity as a defence to an action under a contract. He noted that ‘fundamental to a public body’s accountability is the care it exercises in handling public monies’. In the local authority context, this ‘takes legal shape in the principle of their fiduciary duty to local taxpayers’. And a contract made in breach of that ­principle can be one made without statutory power.

The fiduciary duty was articulated (among other places) in the 1925 decision of the House of Lords in Roberts v Hopwood [1925] AC 578, where Lord Atkinson said that: ‘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, in my view, a duty to those latter persons to conduct that administration in a fairly businesslike manner, with reasonable care, skill and caution, and with a due and alert regard to the interest 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. This duty is, I think, a legal duty as well as a moral one, and acts done in flagrant violation of it should, in my view, be properly held to have been done "contrary to law"…’

However, Cranston J referred to the leading modern case of Bromley LBC v Greater London Council [1983] 1 AC 668 (which concerned a supplementary precept issued by Greater London Council (GLC) to enable a 25% fare reduction), where Lord Wilberforce noted that the GLC owed ‘a duty of a fiduciary character to its ratepayers who have to provide the money’.

And Lord Scarman accepted that the House of Lords had to construe the statute in question ‘in the light of the principle that a local authority owes a fiduciary duty to its ratepayers’.

As Cranston J indicated, the binding authority of Bromley ‘means that relevant legislation conferring a power on a local authority must be read subject to the fiduciary duty owed to its taxpayers’. And in the instant case, ‘the statutory duty to the homeless is such a duty against which the fiduciary duty must be balanced’. In the circumstances, Cranston J considered the crucial point to be ‘that the councils never had regard to what was the market rent for the various properties leased from CTE’.

The rent in question had been ‘formulaic, fixed even before the properties were identified and purchased’. And 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’. Since compliance with fiduciary duties demanded that the authorities in question had regard to market rents on agreeing the rents payable to CTE for the properties leased, they had acted outside their powers in failing to do so. The leases were therefore void and of no effect.

But while the authority succeeded on this point (although, as mentioned, failed on various other public law issues, including its alleged defects in the decision process – improper purpose and failure to have regard to irrelevant considerations), the court did afford CTE some relief. In the view of Cranston J, CTE had ‘at all times acted in good faith’ and had acted in no way negligently or foolishly. The company had had ‘no reason to doubt the decision-making procedures behind the scenes at both councils’. In the circumstances, Cranston J considered that CTE could benefit from the ‘change of position’ defence. As he pointed out, this ‘is based on a principle of justice designed to protect a party from a restitutionary claim in ­circumstances where it would be inequitable to pursue the claim, at least in full’. And CTE had, in the court’s view, changed its position without any fault on its part. In the circumstances, since the councils had had the benefit agreed under the leasehold terms, CTE was entitled to the rent agreed. And loans from Penwith of £350,000 should equitably be repaid in due course in accordance with the relevant loan agreement terms and conditions.

Comment

So a key public law principle of proper stewardship of public money was maintained in the case while doing justice, as Cranston J saw it, between the parties. Public law ­principles are coming ever more prominently to the surface, as those affected by local authority budget cuts subject the authorities in question to rigorous and penetrative scrutiny through extensive judicial review ­challenges.

But while increasingly pervasive public law duties make local authority decision-making (and any consequent litigation) increasingly complex, some authorities are managing to come safely out the other side - at least at first instance. London Borough of Brent is one recent example where a challenge to its careful and painstaking decision to close six libraries was upheld by Ouseley J on 13 October (R (Bailey and others) v Brent London Borough Council [2011] EWHC 2572). And although permission to appeal has been granted in Brent, the judgment of Ouseley J does graphically illustrate the detailed attention required by authorities across the spectrum of public law duties.

Dr Nicholas Dobson is a senior consultant with Pannone specialising in local and public law. He is also communications officer for the Association of Council Secretaries and Solicitors