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Did the British government rewrite the law to avoid contractual obligations with Railtrack?

Posted by James Hammerton @ 8:07 pm on 6 March, 2009.
Categories democracy and the rule of law, British politics.
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Tom Winsor, the former Rail Regulator recounts how the British government rewrote the law to avoid some contractual obligations:

Trying to legislate to annul an inconvenient contract binding on the State (or a state-owned bank) would do massive harm to Britain. What company in its right mind would place reliance on a contract with a Government that is prepared, after the contract has been signed, to use its legislative pen to strike out the clauses it later decides that it doesn’t like? If we go down this route we get close to the status of developing countries, such as as former Soviet republics, where foreign private companies need special protection against political interference in their contracts with host governments. Their technique is usually to set up enforcement of the contract in a neutral third country, with direct recourse against the foreign-held assets of the state in question. Is that really where the British Government wants to take us?

Unfortunately, the present Government has form. In 2001, the Government’s No1 hate figure then was Railtrack. Ministers decided it had to be taken out, and a cunning plan was devised in the Treasury to euthanase the company and get its assets for nothing. To do this, in the words of Mr Brown’s closest adviser then, Shriti (now Baroness) Vadera, they decided to “engineer the solution through insolvency”. If they could persuade the High Court that Railtrack was insolvent, the plan would work.

But Railtrack was not insolvent, because of indemnity clauses in franchise contracts between the State and the private railway companies. Those companies had separate contracts with Railtrack, under which they paid track access charges. If the politically independent Rail Regulator increased the sums the franchisees paid Railtrack, they had back-to-back contractual rights to get the extra money from the State. Very awkward.

Ministers knew that if they simply refused to pay, the franchisees would sue and win. And so the Government decided that it would neutralise these inconvenient contractual indemnities. Emergency legislation was drafted to enable ministers to order the regulator not to increase Railtrack’s income. The indemnities in the franchises would, therefore, never be triggered, and ministers would not have to pay out. Railtrack would be bust.

But hold on, the regulator might not acquiesce. The legislation would be extremely controversial. It couldn’t be passed quickly enough to stop him raising Railtrack’s charges before the door was bolted. Just before the Government revealed this supposed fait accompli to me, Shriti Vadera anxiously warned her colleagues that if I were to resist, “it could make the compensation claim huge”.

When I was told at the very last minute about their great scheme, I was struck not only by the fact that the Government was prepared to do this, but by the information that it had been cleared by both the Prime Minister and the Chancellor.

Despite these very improper threats, I told Railtrack I was prepared to use my powers and race the legislation to the finishing post. But Railtrack had given up, and didn’t fight back. The legislation was ready, but it wasn’t used. Railtrack regarded the threat of it as enough, and went quietly into that long dark night. Threatening companies with legislation to extinguish their contractual rights was obviously a desperately clever thing, and it was kept for the next time some enemy of the State with an inconvenient contract had to be dealt with.

On October 24, 2005, having repeatedly insisted that the independence of the economic regulator for the railways was sacrosanct, Alistair Darling tabled a Commons motion congratulating the Government on the legislative threats it had made to me. So now we know what he thinks of contracts that government later wishes it hadn’t signed. The damage caused by the Government’s handling of Railtrack was severe, and it took years for confidence to recover.

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