Stagecoach East Midlands Trains Ltd and Others v The Secretary of State for Transport
| Jurisdiction | England & Wales |
| Judge | Mr Justice Stuart-Smith |
| Judgment Date | 17 June 2020 |
| Neutral Citation | [2020] EWHC 1568 (TCC) |
| Court | Queen's Bench Division (Technology and Construction Court) |
| Docket Number | Case No: HT-2019000158 HT-2019000187 |
| Date | 17 June 2020 |
[2020] EWHC 1568 (TCC)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
The Rolls Building, 7 Rolls Building
Fetter Lane, London, EC4A 1NL
2019 RAIL FRANCHISING LITIGATION
Mr Justice Stuart-Smith
Case No: HT-2019000158
HT-2019000173
HT-2019000187
and
and
and
and
Tim Ward QC, Ewan West and Daisy Mackersie (instructed by Herbert Smith Freehills LLP) for the Stagecoach Claimants
Jason Coppel QC and Patrick Halliday (instructed by Ashurst LLP) for the WCTP Claimants
Rhodri Thompson QC, Fionnuala McCredie QC, Naomi Ling, Anneli Howard, Brendan McGurk, Azeem Suterwalla, Fiona Banks, Rachael O'Hagan, Tetyana Nesterchuk, Niamh Cleary and Alfred Artley (instructed by Addleshaw Goddard LLP, DLA Piper UK LLP and Eversheds Sutherland (International) LLP) for the Defendant
Valentina Sloane QC (instructed by Burges Salmon LLP) for the FTWC Interested Party
Hearing dates: 20 th/21 st/22 nd/23 rd/24 th/27 th/28 th/29 th/30 th/31 st January 2020 and 12 th/13 th/14 th February 2020
Approved Judgment — Redacted
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Index
| Introduction | 1 |
| Legal Framework | 7 |
| — Articles 49 and 56 TFEU | 8 |
| — The Railway Regulation | 11 |
| — State aid | 15 |
| — Policy and allocation of resources | 20 |
| — Service concession contracts | 24 |
| — The principle of equal treatment | 26 |
| — The principle of transparency | 29 |
| — Financial robustness tests | 38 |
| — Exercising discretions | 41 |
| — Proportionality | 57 |
| — Manifest error in assessment | 62 |
| — Proof of reasons and reasoning | 66 |
| — The duty to give sufficient reasons | 75 |
| — Parliamentary privilege | 77 |
| Factual background | 102 |
| — Privatisation of the railways and the statutory role of the Secretary of State | 102 |
| — The process of franchising | 103 |
| — The terms of the ITT | 105 |
| — The bidding consortia | 107 |
| — The Railways Pension Scheme | 109 |
| — The Pensions Regulator | 112 |
| — The Rail Delivery Group | 115 |
| — The Brown Review | 116 |
| — Departmental Committees | 122 |
| — The pensions problem in outline | 123 |
| — The effect of TPR's intervention | 135 |
| — The Defendant's response to the pensions problem | 145 |
| — The Claimants' response to the pensions problem | 155 |
| — The decisions | 186 |
| — These claims | 193 |
| Additional Chronology, Evidence and Findings | 195 |
| — The development of the ITTs, PRSM and rebid instructions | 195 |
| — Formulation of the final bids | 236 |
| — The WCP and EM rebids | 252 |
| — Assessment and decisions | 273 |
| — The process | 274 |
| — The assessments | 280 |
| — The Ministerial submissions | 332 |
| — The Minister's decisions | 344 |
| — The Defendant's reasons for disqualifying the Claimants | 359 |
| Issue 1 | 374 |
| Issue 3 | 388 |
| Issue 4 | 403 |
| Issue 5 | 421 |
| Issue 6 | 442 |
| — Issue 6.1 | 442 |
| — Issue 6.2/6.2.1/6.2.2 | 443 |
| — Issue 6.2.3 | 451 |
| — Issue 6.3 | 453 |
| — Issue 6.4 | 475 |
| — Error of law: incorrect view that disqualification was the only option | 480 |
| — Manifest errors: misleading Ministerial Submission | 481 |
| — First reason in notification letters: inconsistency with policy | 491 |
| — Second reason in notification letters: no comparison on a fair basis | 495 |
| — Issues 6.4.2–6.4.5 | 498 |
| — Issue 6.4.6 | 499 |
| — Issue 6.4.8 | 504 |
| — Issue 6.4.9 | 508 |
| — Issue 6.4.12 | 510 |
| Issue 8 | 512 |
| Issue 9 | 527 |
| — Issues 9.3 and 9.5 | 529 |
| — Issue 9.2 | 540 |
| — Issue 9.1 | 547 |
| — Issue 9.4 | 568 |
| — Issue 9.6 | 585 |
| Issue 11 | 599 |
| Conclusion | 601 |
Introduction
The basic problem that gives rise to this litigation can be stated simply and shortly. The Defendant Secretary of State was conducting three franchise procurement competitions during a period when there was considerable uncertainty about the scope of potential pension liabilities because of intervention by the Pensions Regulator (“TPR”). The three competitions were for the South Eastern, East Midlands and West Coast Partnership franchises, commonly referred to as the SE, EM and WCP franchises. It was anticipated that the SE franchise would commence on 1 April 2019 and run for 8 years, that the EM franchise would commence on 18 August 2019 and would run for 8 years, and that the WCP franchise would commence on 15 September 2019 and run for 7 or 12 years.
The WCP franchise differed from the others because it was structured to accommodate the development of the High Speed railway link between London and the North (“HS2”) when that came on stream. The WCP franchise arrangements provided that when that happened (which was envisaged in the procurement documents as being on 1 April 2026, with provision for it to happen later) the franchisee would run it and the franchise would switch from what was known as the ICWC (InterCity West Coast) period to what was known as the IOC (Integrated Operator Contract) period. When that switch happened, the financial arrangements would change from being those of a normal franchise to an arrangement under which the Government would bear all costs and revenue risk, with the franchisee being remunerated on a cost reimbursement model to ensure flexible delivery of the integrated West Coast and HS2 services.
This case is only tangentially concerned with what would happen to the WCP franchise during the IOC period. It is substantially concerned with what would happen to the SE and EM franchises and what would happen to the WCP franchise during the ICWC period and any additional period between 1 April 2026 and the switch to the IOC period.
The Secretary of State decided to offer contract terms for each franchise which, subject to defined but limited protection, would place the risk of pension liabilities on the Train Operating Company (“TOC”) that succeeded in securing the franchise. The protection mechanism was known as the Pensions Risk Sharing Mechanism (“PRSM”). The Claimants are TOCs who submitted bids that rejected the Secretary of State's allocation of the risk of pension liabilities and offered to contract on different terms. The Secretary of State was not prepared to contract on the terms proposed by the Claimants and disqualified them from further involvement in their respective procurement competitions, notifying them of that decision by letters dated 9 April 2019.
Three Claimants (who may conveniently be referred to generically as Arriva, Stagecoach and WCTP) issued proceedings challenging the decision of the Secretary of State to disqualify them and making other complaints about the procedure the Secretary of State had adopted. Their complaints may broadly be divided into two categories: (a) those relating to pensions and (b) other matters.
After an expedited process, the pensions issues came on for trial over three weeks in January and February 2020. Arriva settled on the Friday before trial on terms that are confidential and not known to the court. Arriva has remained an interested party in relation to the EM competition and proceedings. Its legal team (Mr Moser QC, Mr Barrett, Mr Williams and Ms McAndrew instructed by Stephenson Harwood LLP) had played a full and constructive part in the litigation until then, but they took no part in the trial hearing. This judgment is the result of the trial of pensions issues that followed. At the request of those representing the Defendant, I shall only use gender-specific terms if referring to the holder of the office in person; otherwise I shall refer to the Defendant generically as “it”. I shall refer to the Department for Transport as “the DfT” or “the Department” indiscriminately.
The Legal Framework
It is common ground that, in procuring these franchises, the Defendant was subject to:
i) Articles 49 and 56 of the Treaty on the Functioning of the European Union (“TFEU”);
ii) The duties imposed by Regulation 1370/2007 (“the Railway Regulation”); and
iii) General Principles of EU law, specifically the principles of non-discrimination, proportionality, transparency, equal treatment, the protection of legitimate expectations, the requirement to act without manifest error, and good administration.
Articles 49 and 56 TFEU
The Claimants submit that Articles 49 and 56 are relevant to Issue 4.
Article 49, concerning freedom of establishment, provides:
“Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.
Freedom of establishment shall include the right to take up and...
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