Out-Law News 2 min. read

High Court reduces Ombudsman-awarded compensation due to local authority "financial pressures"

A recent High Court decision risks "emasculating" the Local Government Ombudsman (LGO), an expert has said, after the judge allowed the authority to pay only one fifth of the compensation awarded against it.

Craig Connal QC of Pinsent Masons, the law firm behind Out-Law.com, said that given current financial constraints on local authorities and other public bodies, the case deserved "close scrutiny". The local authority, South Holland Council, did not challenge the LGO's findings of maladministration, injustice and loss caused by its handling of a planning issue involving Nestwood, a developer.

"Perhaps one decision may not yet make a sound foundation for a policy, but if this line was to be adopted more generally, presumably no public body would ever pay compensation in full - at least until we emerge from the current period of austerity, whenever that might be," he said.

"South Holland Council did not attack the LGO's calculation, nor any of the underlying approaches he adopted to reach the result. They stood firmly on financial constraints. They had assets but obviously did not want to sell any of them. They had reserves of £1.9 million, but felt they needed these to weather ongoing financial storms. They did not, one could assume, want to save elsewhere in their budget or increase the council tax. All perfectly understandable and, on one view, all equally irrelevant – why should any of that prevent them having to pay what had, repeatedly, been held to be appropriate?" he said.

The LGO has the power to investigate complaints of alleged maladministration by local authorities. It can then make recommendations to remedy the injustice caused by that maladministration. Any findings of maladministration, injustice and loss suffered as a result by the LGO are binding on the authority unless successfully challenged by way of judicial review, but the authority is not obliged to accept and act on the LGO's recommendations as to the remedy. Its decision how to respond is instead governed by usual general public law requirements of good faith, rationality and fairness.

Nestwood purchased a piece of land with planning permission for residential development in June 2005. Later that year, the council granted further planning permission. In January 2006, a council officer confirmed that conditions attached to the planning permission had been satisfied, after which Nestwood began building works. Following complaints from neighbouring residents, the council then informed Nestwood that it did not have planning permission for the specific type of work. Prospective purchasers of the land later withdrew on grounds of delay and difficulties with the planning permission, and enforcement action was taken against the developer in 2007.

Nestwood applied to the LGO for compensation of £1.2 million. The LGO ultimately recommended compensation of £250,000 on the grounds of South Holland's maladministration. However, the council did not accept the recommendation and resolved to pay only £50,000 plus interest. Nestwood applied to the High Court for a judicial review on a number of grounds, including the council's failure to provide adequate reasons for the lower figure and an allegation that it had given "excessive weight" to the affordability of the compensation.

In his judgment, Mr Justice Sales said that affordability and "the impact upon the Council and the services it would provide" were "lawful relevant considerations" for South Holland to take into account when suggesting compensation. Although the payment was "well below what was recommended" by the LGO, it "could not be considered to be insignificant", he said.

"The relevant legal test is a rationality test, albeit conditioned by the findings made by the LGO," he said. "The findings of serious maladministration, injustice and loss reduced the range of legitimate rational decisions lawfully available to the Council, but did not eliminate all discretion for the Council in deciding what to do."

"I have approached the decision in this case with concern, because of the serious findings of maladministration, injustice and loss made by the LGO and the substantial contrast between the compensation recommended by the LGO and that eventually decided by the Council. Against this background, I have subjected the Council's decision and decision-making process to careful scrutiny. However ... I consider that the Council has acted within the law," he said.

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