Not all that glitters is gold

Not all that glitters is gold


Rowan Pennington-Benton discusses legitimate expectations in times of financial crisis

To what extent should the courts hold governments to public assurances given to groups of people? During periods of financial and economic turmoil, the question is an important and timely one. In United Policyholders Group v The Attorney General of Trinidad and Tobago [2016] UKPC 17 (the UPG case) the Privy Council confronted this issue, providing some guidance and clarification of the law on legitimate expectations.

The case concerned the collapse of CLICO, a major insurance company and part of the CL Financial group (CLF) '“ an organisation with assets totalling around 70 per cent of Trinidad and Tobago's GDP.

CLICO's portfolio included short-term investment products offering high rates of interest payable over short maturity periods. It hit cash flow problems as policyholders sought to withdraw their deposit balances during difficult market conditions in 2008/09. The Central Bank advised that an ongoing run on CLICO by policyholders could cause wider problems for the economy. The government agreed to inject around TT$5bn to help meet CLICO's short-term liquidity demands. CLF agreed among other things to sell certain of its assets to help meet ongoing demands.

A number of public statements were made by the government, including that policyholders would 'get back and recoup all of their losses'. The claimant policyholders contended that these gave rise to a legitimate expectation that, if they refrained from withdrawing their balances, the government would guarantee to them their full contractual entitlement.

The difficulties, however, continued. CLF assets were overleveraged, locked in arbitration, or underperforming. In May 2010 a new government was elected. According to the findings of a select committee, CLICO's liability to policyholders, over its assets, was around $7.9bn. The new minister for finance took the view that the actions of the previous administration were ill-advised and had not worked.

The government decided to make policyholders an offer. They would receive $75,000 in cash, with the remainder of their policy balances (not including interest) paid in government bonds amortised over a 20-year period at zero percent. The deal was later amended to allow for the last ten years of the bonds to be traded for shares in a new investment fund. The offer allowed the government to spread the cost of assistance over a number of budgets, but in real terms meant a reduction for policyholders as against their full contractual entitlement.

The claimants issued judicial review proceedings, alleging that the offer amounted to a breach of their legitimate expectations. They succeeded before the High Court, but lost in the Court of Appeal. They appealed to the Privy Council.

Proportionality test

Lord Neuberger gave the lead judgment,

with which Lords Mance, Clarke, Sumption,

and Carnwath agreed. The Board restated the longstanding test that in order to give rise to legitimate expectations the assurances must be 'clear, unambiguous and devoid of relevant qualification' (per Bingham LJ in
R v Inland Revenue Commissioners, ex parte MFK Underwriting Agents Ltd [1990] 1 WLR 1545). Some of the statements relied upon were not as clear as others, but the Board was content to proceed on the basis that the statements did give rise to legitimate expectations.

The Board moved to consider whether the government was entitled to resile from the assurances given. One of the ongoing controversies in this area is the appropriate test in this respect. Laws LJ has advocated for the adoption of proportionality whereby a public authority can depart from a promise only if doing so 'was a proportionate response'¦ having regard to a legitimate aim pursued by the public body in the public interest' (see R (Nadarajah) v Secretary of State for the Home Department [2005] EWCA Civ 1363

and R (Niazi) v SSHD [2008] EWCA Civ 755).

Some commentators have suggested

that proportionality is inapposite as it tends to encourage close review of the political merits of the decision, but the test has gained traction in

the High Court and Court of Appeal. The question of its appropriateness was, however, left open by Lord Mance in R (Bancoult) v Secretary of State for Foreign and Commonwealth Affairs (No 2) [2008]

3 WLR 955, para 182.

In the UPG case Lord Carnwath endorsed the proportionality test but with an important caveat: 'In judging proportionality the court will take

into account any conflict with wider policy

issues, particularly those of a macro-economic or macro-political kind'. The UPG case plainly involved just those sorts of issues. The Board accepted that CLICO's financial problems were more serious than originally thought. Restoring CLICO's asset deficit would have required the government to inject in the short term around $7bn of taxpayers' money, meaning significant restrictions in public spending that year, and a possible downgrading by the IMF. The government was, it held, entitled to resile from the assurances given.

It seems that proportionality has, in this area

at least, won the war over Wednesbury. It must, though, be applied with varying intensity, sensitive to the subject matter and context of the dispute. In cases involving macro-economic or macro-political issues, there is unlikely to be any real difference between the application of proportionality and Wednesbury (see Professor Paul Craig, 'The Nature of Reasonableness Review' (2013) 66 CLP 131;

and Lord Mance in Kennedy v Charity Commission [2015] AC 455, at paragraph 54). All this is,

however, subject to some further and important observations made by Lord Carnwath about the nature and scope of this ground of review.

The Coughlan principle

His Lordship considered the roots of the doctrine in the early tax cases and the seminal judgment in R v North and East Devon Health Authority ex parte Coughlan [2001] QB 213. He noted the truly exceptional facts of Coughlan, in which the

public authority was prevented from resiling

from a clear and unqualified promise of specialist housing made to a severely disabled woman, in circumstances where its enforcement had no wider implications for general policy or expenditure.

He contrasted that with the 'wide-ranging and open-ended nature of the legal discussion' on the subject since and the continuing 'intense judicial and academic controversy'. He suggested that the court in Coughlan may have been 'unnecessarily ambitious' in seeking to find a unifying doctrine to cover both procedural and substantive legitimate expectations. This 'tended to underplay the important difference that the latter involves'¦ [namely] potential conflict with the discretion

of public authorities to formulate and

reformulate policy'.

He advocated a 'narrow interpretation of

the Coughlan principle': 'Where a promise or representation, which is 'clear, unambiguous and devoid of relevant qualification', has been given

to an identifiable defined person or group by a public authority for its own purposes, either in return for action by the person or group, or on the basis of which the person or group has acted to its detriment, the court will require it to be honoured, unless the authority is able to show good reasons, judged by the court to be proportionate, to resile from it.'

This formulation will likely exclude claims by larger groups of people. They will tend to find it difficult to each establish detrimental reliance or that they each agreed to act or refrain from acting in reliance on the promise. Emphasising the need for detrimental reliance, or at least a relevant change of position, is also likely to constrain this ground of review. That said, dicta downplaying

the need for detrimental reliance was a relatively recent feature of the case law and at least in part driven by a perceived need to bring within the scope of the doctrine cases dealing with changes of general policy, or where a general policy is not applied to a particular individual. '©These cases have always been difficult to fit within the rubric of legitimate expectations, particularly where the individual is not aware

of the policy in the first place. Lord Carnwath pointed, however, to a growing recognition

that inconsistency in the application of policy

is a standalone ground, outside of the law of legitimate expectations. The author notes similar observations in Mandalia v SSHD [2015] 1 WLR 4546, per Lord Wilson. The removal of these sorts

of cases does at least bring some clarity to the law of legitimate expectations.

As to the principles or policy underlying this ground of review, there is some support for the notion that it is about trust in public authorities (see Paul Reynolds, 'Legitimate expectations and the protection of trust in public officials', PL 2011, Apr, 330-352); or similarly a 'requirement of good administration'¦ deal[ing] straightforwardly

and consistently with the public' (per Laws LJ in Nadarajah). Where, however, the assurance relates to broader economic, political, or social issues,

or is addressed to larger groups of people, it seems that the courts will not be stepping into the

arena to hold the government to its promises.

The line between the roles of the judiciary and the executive is firmly delineated. The cost of broken promises is to be borne (if at all) at the ballot box.

Rowan Pennington-Benton is a barrister at 3 Hare Court, specialising in public and commercial law. He was one of

the junior counsel in the UPG case, led by Howard Stevens QC @3HareCourt