Regina v. Secretary of State for Transport, Ex parte Factortame Ltd and Others

This appeal concerned whether legislation and delegated measures enacted in the United Kingdom (notably the nationality, domicile and residence conditions in section 14 of the Merchant Shipping Act 1988) which were held by the European Court of Justice to breach Community law, constituted breaches "sufficiently serious" to give rise to state liability in damages under the principles explained in Francovich and in Brasserie du Pêcheur / Factortame III. The House of Lords confirmed the three-fold test (rule intended to confer rights; sufficiently serious breach; direct causal link) and held that the nationality, domicile and residence conditions, together with the United Kingdom's failure to give immediate effect to the President's order of 10 October 1989, amounted to a sufficiently serious breach.

The Lords applied the Factortame III guidance on "sufficiently serious" breaches: clarity of the rule breached (Article 52 EEC and related treaty provisions), the margin of discretion available, whether the breach was manifest and grave, the attitude of the Commission, the availability and quality of legal advice, and the consequences and persistence of the measures. On balance the discrimination was manifest, grave and not excusable and therefore gave rise to an entitlement to compensatory damages for loss directly caused by those breaches.

The respondents were owners, managers, directors or shareholders of fishing vessels registered in the United Kingdom prior to legislation in 1988 which required a high proportion of British nationality, domicile and residence among owners, crew and managers in order to qualify for registration and to fish against United Kingdom national quotas. Those provisions, enacted to combat "quota hopping", were referred to the European Court of Justice and ultimately held to be contrary to Community law. The respondents sought damages from the United Kingdom for losses allegedly caused by the breaches. The Divisional Court and Court of Appeal found the breaches sufficiently serious to permit compensation; the Secretary of State appealed.

Nature of the claim: a claim for compensatory damages under Community law principles (Francovich and Brasserie du Pêcheur / Factortame III) for loss said to flow from national measures held to infringe treaty freedoms, particularly the right of establishment (Article 52).

Procedural posture: the case reached the House of Lords by appeal from the Court of Appeal, following detailed proceedings in the Divisional Court and a series of references/decisions by the European Court of Justice (Factortame I–III and other authorities).

Issues framed by the court:

• Whether the relevant Community provisions were intended to confer rights on individuals (accepted);
• Whether the breaches by the United Kingdom were "sufficiently serious" to attract state liability for damages under Community law (the principal issue);
• Whether there was a direct causal link between the breaches and the damage (deferred to later fact-finding).

Reasoning and outcome: applying the Factortame III factors, the House of Lords emphasised the fundamental character and relative clarity of the treaty prohibitions on nationality discrimination (Article 52 and related provisions), the Government's knowledge of the Commission's adverse view, the deliberate decision to adopt primary legislation with a short transitional period preventing interim domestic relief, the inadequacy of any excusatory legal uncertainty by the time of enactment and retention, and the grave and foreseeable damage to a defined group. The Lords therefore held the breaches were "sufficiently serious" and dismissed the appeal, concluding entitlement to compensatory damages for loss directly caused by those breaches (causation to be determined subsequently).

Appeal dismissed. The House of Lords held that the nationality, domicile and residence conditions in section 14 of the Merchant Shipping Act 1988, and the delayed compliance with the European Court's interim order, amounted to breaches of Community law that were "sufficiently serious" (manifest and grave disregard of the limits of the United Kingdom's discretion) and therefore gave rise to an entitlement to compensatory damages for damage directly caused by those breaches. The Lords applied the Factortame III criteria (clarity of the rule breached, margin of discretion, excusability, Commission's position, persistence and consequences) and found the breaches inexcusable in all the circumstances.

Divisional Court (reference to the ECJ and initial findings) [1997] EuLR 475; Court of Appeal [1998] EuLR 456 (appeal from Divisional Court); reference and related judgments from the European Court of Justice including Factortame I (Case C-213/89) [1990] ECR I-2433 and Factortame II (Case C-221/89) [1992] QB 680; guidance from Brasserie du Pêcheur / Factortame III (Joined Cases C-46/93 and C-48/93) [1996] QB 404 informed the liability analysis on appeal to the House of Lords.