Market view: Are public bodies bound by their promises?

The renewable energy sector in the UK has recently been subject to significant policy changes making it a less stable and attractive place for investment.

Recent cases have challenged these changes through judicial review on the basis of “legitimate expectation”. The cases illustrate the rigorous requirements for a successful challenge and the courts’ hesitation to second guess Government’s decisions based on the concept of legitimate expectations.

In Solar Century, the claimants challenged the Government’s decision to bring to a premature end a scheme supporting electricity generation from renewable sources (the “RO scheme”).

The claimants in Infinis challenged an Act of Parliament which withdrew an exemption for renewable energy generators from paying an environmental tax (the “RSE exemption”) on 24 days’ notice.

Both challenges were rejected by the High Court and the Court of Appeal.

A successful challenge based on legitimate expectations must satisfy the following overlapping requirements: 

• The public body must make an express or implied representation; 
• The representation must induce a legitimate expectation; and 
• The public body must frustrate that legitimate expectation in a way which amounts to an abuse of power.

Has the public body made a representation?

In Solar Century, it was not disputed that the Government made an express representation that the RO scheme would continue until 2017.

However, in Infinis, the claimants argued that the Government made an implied representation that it would not remove the exemption without sufficient notice based on (i) settled practice (ii) inferences from the Government’s package of renewable energy support programmes and (iii) the fact that no economic operator foresaw the removal of the exemption.

The court considered how a prudent and circumspect operator should have interpreted these materials and found that although the Government’s renewable energy support programmes assumed that the RSE exemption would continue, all a prudent and circumspect operator would have inferred is that current renewable energy support programmes assumed the continuance of the RSE exemption. In addition, the inconsistency in the claimants’ arguments regarding the lead time that was promised reflected the absence of any precise assurance.

The representation must induce a legitimate expectation

In Solar Century the court found that there can be no expectation that a policy will continue until a certain date simply because an end date was given. Despite Government’s strong assurances to the industry that it would provide a stable environment for investments, there could not have been an expectation that the RO scheme would be protected at the expense of others. Stability was one of several objectives set by Government which could not be achieved without compromise.

In Infinis, the defendant argued that there could be no legitimate expectation because constitutionally Parliament could not bind itself. Moreover, changes to policies were unpredictable given the discretionary powers public bodies have in these areas. The court agreed and found that in the absence of precise assurances “a prudent and circumspect economic operator would appreciate that the tax authorities and the national legislature might change the tax code without giving notice”.

Has the public body frustrated that “legitimate expectation” and, if so, was that an abuse of power?

If a legitimate expectation has been frustrated, the next question is whether this was an abuse of power. This involves weighing the unfairness to the claimant against the public interest.

Public bodies are less likely to be bound by a legitimate expectation if yielding to it would affect the public at large. The more a decision has macro-economic or political implications the less intrusive a court can be. However, where a public body frustrates a legitimate expectation it should give proper consideration to this before doing so.

In Solar Century the High Court found that even if a legitimate expectation arose, the Government was justified in frustrating such an expectation. The changes were implemented in the public interest to adhere to Treasury’s austerity budget. Finally, the Government had considered the conflicting interests and fairly reached its decision.

Both the Court of Appeal and High Court in Infinis agreed that no legitimate expectation had arisen and in those circumstances the Government had sufficiently weighed the claimant’s interests against the public interest. However, the High Court also provided that if there was a legitimate expectation, the Government must meet a more stringent test and demonstrate that legislative amendments are required with immediate effect notwithstanding that entrenched private interests will be harmed. The High Court found that the defendant would not have met that test.

The future of legitimate expectation cases

While litigation is laborious, in comparison to general commercial litigation, judicial review is speedier and cheaper. This coupled with the considerable commercial impact of these decisions, may make a challenge worthwhile despite the difficulty in succeeding on the grounds of legitimate expectation.

The principle of legitimate expectation is a fragmented area of law which could be used to permit practical justice. Accordingly, a different case with a different set of facts may indeed be successful.