The link between purpose-led businesses, ‘B Corp’ certification and the Better Business Act
Out-Law Analysis | 01 Feb 2021 | 11:46 am | 8 min. read
With the implementation of the UK-EU Trade and Cooperation Agreement (TCA) into domestic law, including all subsidy control commitments, by virtue of section 29 of the EU (Future Relationship) Act 2020, a domestic subsidy control regime in the UK has now been established.
At the same time, a number of important issues require due and urgent attention if the subsidy control system is to be more effective. Amongst these, businesses need greater clarity on the questions of what remedies might be available to them and when in the event that they are adversely affected by the grant of public subsidies to competitors in the UK.
With a public consultation on a domestic subsidy control regime imminent, businesses should take the opportunity to consider carefully issues such as those highlighted below, and feed their views into the exercise.
An important aspect of the subsidy control commitments under the TCA is the creation of rights allowing competing businesses and other interested parties – subject to them having the necessary standing under each party’s domestic laws – to challenge subsidies in the relevant court or tribunal, and have access to “effective” remedies. Equally important in this context, is the right of either party, subject to being granted relevant judicial permission where this is required, to intervene in domestic judicial review cases.
This is the first time that a bilateral EU trade agreement incorporates “vertical” remedies that, in principle, allow interested parties to challenge subsidy, or state aid, awards in the domestic courts of the granting authority. The incorporation of these provisions means that pursuing a remedy for breach of relevant TCA obligations will be easier and more effective than relying on the Agreement’s inter-party dispute resolution mechanisms and remedial measures alone.
As to specific obligations in this context, the TCA commits both the UK and the EU to ensuring that their domestic courts or tribunals have the competence to review the compliance of subsidy decisions with the Agreement's subsidy principles and to review relevant decisions by the independent regulator that each party is obliged to establish or maintain, including that regulator's failure to act. The effective remedies available in this context must include orders suspending, prohibiting or requiring that a specific action be taken, as well as the award of damages and the recovery of the subsidy from the beneficiary.
In terms of subsidy recovery, the TCA incorporates detailed provisions that relate to the parties’ obligation to have in place an effective subsidy recovery mechanism, explicitly referencing their recognition that recovery is an “important” remedial tool in any subsidy control system. Accordingly, the relevant domestic court or tribunal must have the power to order the recovery of the subsidy where it makes a finding of material error of law in that in granting a subsidy the granting authority did not treat it as a subsidy; failed to apply, either at all or to the necessary standard, the subsidy principles, or; misused or acted outside the scope of its powers. The TCA makes clear that the beneficiary should not be able to raise a legitimate expectation to resist recovery.
A related issue which the TCA does not address is the question of whether, in effecting recovery, the beneficiary should also be required to pay interest for the period during which it had the benefit of the subsidy. Arguably that should be the case so as to ensure that the beneficiary retains no benefit from an illegal subsidy and the level playing field is fully restored.
In line with current UK law requirements the expectation is that, where the court quashes the decision to grant a subsidy, in principle, damages should also be available under judicial review but also as a separate cause of action for breach of statutory duty. For a claimant to have access to the remedy of damages on this basis, that claimant must show that the statutory duty – in this case, the obligation on a public body to respect the subsidy principles set out in the TCA when granting subsidies – was intended to protect a limited class of the public – in this case, interested parties whose interests are affected by the grant of the subsidy – and that Parliament intended for a right of action to be available where that duty is breached. This third condition should be met here, given that TCA commitments are now binding under domestic law and, as noted earlier, require that effective remedies, including the remedy of damages, should be made available in these circumstances.
At the same time, the position is somewhat different when it comes to subsidies which are granted by means of primary legislation. The grant of a subsidy on the basis of an Act of the UK Parliament, but not that of the assemblies or parliaments of devolved administrations, is expressly exempt from the requirement for recovery under the TCA. This would seem consistent with the principle that, under UK law, primary legislation cannot ordinarily be quashed by the courts. The corollary to this must be that, in addition to recovery not being available, a damages claim would also be ruled out given that there will be no “unlawful” act on which to base such claim.
When the UK was a member of the EU, domestic courts had the power to disapply primary legislation when it breached EU law obligations. This could have then led to the possibility of a damages claim by an individual who suffered loss or damage as a result of that breach, subject to certain conditions being met. This was possible on an exceptional basis by reference to the principle of the supremacy of EU law and the doctrine of vertical direct effect. Subject to certain transitional provisions, neither is now recognised under UK domestic law.
Desirable as it might be from the perspective of ensuring the availability of effective remedies in all circumstances, it would seem unlikely that the UK would be minded to reintroduce similar rights for the purposes of its subsidy control system, not least in light of the fact that the TCA does not require it to do so. Indeed, the Agreement states expressly that there is no requirement on the UK to widen the scope or grounds of review by its courts and tribunals of primary legislation.
The clear consequence of this is that it would be difficult for adversely affected parties to have access to an effective remedy where a subsidy is granted by means of an Act of Parliament. Although disappointing, this outcome is perhaps not surprising in light of the seminal role which respect for each party’s sovereignty played in the drafting of the Agreement. Ultimately, the expectation must be that, in line with the good faith obligations of the parties, Acts of Parliament will not be used as a means of bypassing the application of the TCA subsidy principles other than in duly justified exceptional circumstances.
Where primary legislation is used in this way, any distortion of 'the level playing field' is likely to persist, unless the effects on trade or investment between the parties which the subsidy causes is of such magnitude as to permit the EU to seek remedial action on an inter-party basis under the terms of the TCA.
The TCA incorporates express limitation period provisions only in relation to the availability of a recovery order. According to these, the interested party must challenge the decision to grant the subsidy before the relevant court or tribunal within a month of certain key information about the grant of the subsidy having been published on the UK or EU's official website or public database, whichever is relevant. Where, before the expiry of this one month period, an interested party requests the provision of certain additional information, so as to assess whether the subsidy principles have been applied correctly, the period within which the remedy of recovery is available is extended by a month, starting from the date on which the interested party received this additional information. Special provisions apply when seeking a recovery order in relation to subsidy schemes.
As noted earlier, the Agreement is silent on the question of limitation in relation to any other remedies. Instead, it provides that the judicial review of relevant decisions and the grant of remedies must be in accordance with each party’s general and constitutional laws and procedures.
Under current domestic judicial review rules, applicants are normally – there are some exceptions – required to act promptly and in any event within three months from the date when grounds for the judicial review application first arose. A key concern with the application of these requirements in this context is that where a subsidy-related decision is made in a way which gives rise to a claim, information about that decision may not be available until well after the three-month period has expired. The option of then simply having to rely on the court’s power to exercise its discretion in each of these cases so as to extend that period would seem unsatisfactory as it does not provide for legal certainty.
Accordingly, it would seem appropriate for domestic legislation to be amended so that the limitation period commences from the time when the claimant knew or ought to have known of the alleged breach. Depending on the specific circumstances of each case, this could be from the time when the key information, or additional information about the grant of a subsidy, was made available.
Equally, the requirement for “promptness” should also be disapplied in this context, again with a view to providing for greater legal certainty and ensuring compliance with the commitment to ensure the availability of effective judicial remedies. Arguably, this is not only desirable but also necessary in order to ensure the availability of the recovery remedy within the full period mandated by the TCA.
For example, a prerequisite to recovery would normally be a quashing order setting aside or cancelling the decision to grant the subsidy. By implication, therefore, the remedy of a quashing order and indeed, an order requiring the granting authority to take specific action to effect recovery, must also be available throughout the period within which a recovery order may be pursued, without the need for a court to consider first the question of “promptness”.
As to the remedy of damages, as argued previously, in addition to damages being available following a successful judicial review, an affected party should also have the option of bringing a separate and standalone claim for breach of statutory duty where the grant of a subsidy breaches the TCA subsidy principles. The limitation period for such claim is the substantively much longer period of six years from the time of the alleged breach.
No doubt, businesses would welcome with relief the ability to challenge, where appropriate, the grant of subsidies which affects adversely their interests in the local courts. At the same time, the question of remedies is complex and a number of related issues which are central to the development of a fair domestic subsidy control regime require further clarification. It is to be hoped that these and other related matters will receive due consideration in the context of the forthcoming public consultation on subsidies with a view to ensuring that, where necessary, rules are clarified, simplified or otherwise amended so that effective remedies are available to businesses seeking to challenge subsidy-related decisions.
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The link between purpose-led businesses, ‘B Corp’ certification and the Better Business Act