R v Secretary of State for Transport, Ex p Factortame Ltd (No 5)

A member state must compensate an individual for breach of Community law where the rule infringed confers individual rights, the breach is sufficiently serious, and the breach directly causes the loss.

Where the state had a wide legislative discretion, the decisive question is whether it manifestly and gravely disregarded the limits of that discretion. This is an objective, fact-sensitive assessment. Relevant considerations include the importance and clarity of the rule, the available discretion, excusability, intention, existing authority, the position of Community institutions, persistence in the breach, and the persons and losses affected.

Good faith and reliance on legal advice do not preclude liability. Deliberately adopting directly and indirectly discriminatory legislation, despite known legal risks and Commission opposition, may cross the required high threshold.

The respondents owned, managed or held interests in fishing vessels which lost British registration under the nationality, domicile and residence requirements imposed by section 14 of the Merchant Shipping Act 1988. Those requirements had been held incompatible with Community law. The respondents sought compensation for losses directly caused by the United Kingdom's breach.

The Divisional Court, reported at [1997] EuLR 475, and the Court of Appeal, reported at [1998] EuLR 456, unanimously held that the breaches were sufficiently serious to attract liability. Causation and the quantification of loss were deferred.

The Secretary of State appealed. The central issue was whether the adoption and application of the nationality, domicile and residence conditions amounted to a manifest and grave disregard of the limits of the United Kingdom's legislative discretion.

Appeal dismissed unanimously.

1. Per Lord Slynn, with Lord Nicholls agreeing with his reasons, Community law conferred a right to compensation where the rule infringed was intended to confer individual rights, the breach was sufficiently serious, and there was a direct causal link between the breach and the damage. The first condition was conceded and causation remained for later determination. The present appeal concerned only seriousness.

2. Per Lord Slynn, the decisive test where the legislature enjoyed a wide discretion was whether the member state manifestly and gravely disregarded the limits of that discretion. The assessment was objective and required consideration of all the circumstances. Relevant matters included the clarity and importance of the rule, the available discretion, whether the error was excusable, the state of the authorities, the position of the Commission, the deliberate or involuntary nature of the infringement, and its foreseeable consequences.

3. Per Lord Slynn, the nationality condition deliberately discriminated in an area governed by a clear and fundamental Treaty rule. The Government knew that the legislation presented serious Community-law difficulties, that the Commission firmly opposed it, and that substantial harm would probably follow. Its legal advice and good faith were relevant but did not make the error excusable. The adoption and subsequent maintenance of the condition therefore constituted a sufficiently serious breach.

4. Per Lord Slynn, domicile was at least as restrictive and discriminatory as nationality and had to be treated in the same way. Residence amounted to indirect or covert nationality discrimination. The three conditions were cumulative, and the residence condition was neither confined to fishing communities nor capable, by itself, of achieving the Government's stated objective. All three conditions therefore crossed the required threshold.

5. Lord Hoffmann agreed that the United Kingdom had knowingly taken a calculated risk. Internal legal advice did not excuse the member state because its organs were treated as one aggregate entity. The legislation also went beyond measures capable of securing a real economic link between fishing operations and local communities.

6. Lord Hope emphasised the fundamental nature of the right of establishment, the obvious potential for serious and irremediable loss, and the deliberate use of primary legislation with a short transitional period which prevented effective interim protection. Lord Clyde treated the inquiry as a broad assessment in which no single factor was necessarily decisive and agreed that the conclusions below should stand.

7. The failure to give immediate effect to the President of the European Court's order of 10 October 1989 was independently sufficiently serious. The respondents were entitled to compensation for loss shown to have flowed directly from the breaches, subject to the deferred issue of causation.

1. House of Lords: Dismissed the Secretary of State's appeal unanimously and affirmed that the nationality, domicile and residence conditions involved sufficiently serious breaches of Community law: [2000] 1 AC 524 .
2. Court of Appeal: Unanimously affirmed the Divisional Court's conclusion that the breaches were sufficiently serious: [1998] EuLR 456.
3. Divisional Court: Held that the breaches, including the delayed compliance with the President of the European Court's order, were sufficiently serious to found liability in damages: [1997] EuLR 475.