Statutory licence or contract

In R (Dean) v Secretary of State for Business, Energy and Industrial Strategy [2017] EWHC 1998 (Admin) (Holgate J) the Administrative Court had to consider whether a licence was a statutory instrument governed by public law or a contract subject to ordinary contractual law principles, for the purposes of establishing whether a deed of variation was outside of the Secretary of State's powers.

Key points

• An analysis of whether a licence granted under legislation is a public law instrument or gives rise to a contractual relationship begins with analysis of the relevant legal framework
• Where a licence grants private rights, whether contractual or proprietary, and is not part of a wider regulatory framework it is more likely to be governed by private law than public law
• Similarly, where the grant of a licence depends on the licensee's agreement, this is a factor that may tend more towards a private law relationship than a public law one

Background

In September 2008, the defendant Secretary of State granted a Petroleum Exploration and Development Licence (the "Licence") to the interested party, Dart Energy (West England) plc ("Dart"), along with two other companies (together, the "Licensees"), pursuant to powers under the Petroleum Act 1998 (the "Act"). The Licence permitted the Licensees to search and bore for and get petroleum, ie "frack". The overall duration of the Licence was split into three periods: an "Initial Term", a "Second Term" and a "Production Period". The Secretary of State and the Licensees subsequently entered into a deed of variation in July 2016 (the "Deed of Variation") which varied the terms of the Licence. The Deed of Variation sought to increase the Initial Term and to reduce the Second Term, while leaving the Production Period and overall duration unaltered.

The claimant sought to argue that the defendant had acted ultra vires in agreeing to enter into the Deed of Variation, essentially on the basis that the Act set out a complete statutory code governing licences such as the Licence and did not include a power to vary the Licence once granted. The Secretary of State and Dart, by contrast, argued that the Licence was a contractual relationship involving the grant of property rights, which was capable of being varied by the parties according to standard principles of contract law.

The Court's decision

The Court concerned itself only with the legal issues, without getting into the merits or otherwise of the "fracking" proposal or objectors' environmental concerns.

Beginning with an analysis of the statutory framework, the Judge highlighted (amongst other matters) that while the model clauses for licences were to be prescribed by regulations under the Act, the Secretary of State had discretion in deciding whether in a particular case those model clauses should be modified or excluded. The Judge also noted the express ability of the Secretary of State and a licensee to alter or delete any provision in any licence granted under the legislation immediately preceding the Act. He observed that the Act contained no provisions giving licence applicants any rights of appeal against the Secretary of State, did not provide for any form of public consultation or other participation in the licensing process, and had no statutory review procedure in relation to licensing decisions, in contrast to other legislation (eg the Town and Country Planning Act 1990). The Judge then considered the regulations containing the model clauses, before dealing with requirements of EU law. Next, he went through the evidence on how the UK Government had run the licensing system in practice over many years, before turning to the Licence and the Deed of Variation themselves.

The Court held that the Deed of Variation was lawful within the Secretary of State's powers:

• The Licence was essential for the Licensees not only to be able to search for and extract oil and gas, but also to obtain the right to own the product so as to be able to sell it to third parties: these were private law rights, essential to their business. Accordingly, the Judge viewed the grant of this kind of licence basically as a property transaction, akin to a mining licence or lease.
• The clauses in the Licence were entirely consistent with a normal grant of property rights in a mining lease or licence.
• The offer of a licence by the Secretary of State was not equivalent to a decision eg to grant planning permission or an environmental permit, neither of which depended on any assent by the licensee, and where generally there was a right of appeal to a different authority. By contrast, licences under the Act only come into existence once the applicant has accepted the terms and has entered into a deed with the grantor.
• Accordingly, the Licence was more than simply a contractual agreement; it was also the grant of an interest in land. In both cases, parties could agree to vary that agreement/grant. There was no need to identify a power to vary: this existed as part of the normal dealings within a contractual relationship created by a contractual deed of licence, irrespective of the fact that the Licence had come about through one party exercising a statutory power to enter into the transaction.
• The model clauses did not form part of a complete statutory code: they were in effect standard form clauses which may or may not be included in an eventual licence.
• The ability to vary the Licence was not incompatible with EU law.
• The case of Inland Revenue Commissioners v Mobil North Sea Limited [1986] 1 WLR 296 which found that a licence granted under predecessor legislation was not a "contract" for the purposes of the relevant Finance Act was not on point. The Judge also distinguished Data Broadcasting International Limited v Ofcom[2010] EWHC 1243 (Admin), considering that the licensing regime at issue in that case (under the Broadcasting Act 1990) was plainly different. For example, the instant Act did not create any regulatory functions for the licensing authority when granting a petroleum licence, such as to regulate a market, or to protect or promote the interests of consumers or parties affected by the activities of licensees. Essentially, the Act provided a mechanism for the Crown to divest itself of the exclusive rights it otherwise had to search for and get petroleum.
• The Judge also had regard to practical considerations, in particular how it must be in the national interest for the Secretary of State to be able to deal with changes of circumstance through variations to licences where appropriate, given the importance of petroleum as a national asset.

The Judge considered that, even if he had found the Licence to be governed entirely by the legislation and public law, he would have found an implicit or incidental power to vary, in the absence of any express prohibition in any provision of the legislation.

Comment

This decision is an interesting contrast to the Data Broadcasting case referred to by the Court. A key point from Data Broadcasting was that licences issued under a statutory scheme by a statutory body are not to be treated as private law contracts and therefore there is no possibility of claiming damages for breach of the licence, or for arguing for implication of certain terms which may be possible in a private law contractual situation. However, as the Judge identified, there are distinguishing factors between Data Broadcasting and the instant case. A further point is that in Data Broadcasting Ofcom was seeking to exercise a power to vary the licences in question unilaterally, which the claimants were seeking to oppose with arguments that the licences were contracts. The Court in that case was mindful that if the licences were held to be contracts, this would expose Ofcom to a potential liability in damages, which it thought would be inconsistent with Ofcom's role and responsibilities as a statutory regulator. This was not on point in Dean, given that the claim was brought by a third party who was entirely dependent on public law applying in order to have standing.

All in all, Dean is a further illustration of how important it is to analyse the true nature of a licence carefully, bearing in mind that whether it is a public law instrument or governed by private law is likely to depend on a number of factors.

Andrew Lidbetter Partner +44 20 7466 2066 Email	Nusrat Zar Partner +44 20 7466 2465 Email	Jasveer Randhawa Of Counsel +44 20 7466 2998 Email