Stagecoach takes rail franchise row to High Court

In early 2019, rail operator Stagecoach made legal history, by facing down the UK government in court.

The row emerged after ministers barred the company from bidding on three major franchises, East Midlands, West Coast and South Eastern. The Department for Transport branded Stagecoach’s bids “non-compliant”  after the company refused to take on long-term funding risks for railway pensions. Ministers wanted to introduce changes to the existing pension liability scheme, which would mean that the government would no longer be the final guarantor of pension shortfalls. Instead, the winning bidder would become responsible for the more than £28bn worth of Railways Pensions.

At the time, the Pensions Regulator estimated there were shortfalls of more than £6bn in pension funding, affecting around 340,000 railway staff. The crisis not only affected current employees, but also those who had already retired.

Stagecoach Stagecoach accused the government of acting unlawfully in its handling of the bidding process, and launched legal action against the DfT. The company was seeking compensation, as well as a judicial review, which would have likely led to successful bidders losing their contracts. The action was backed by its bid partner, West Coast Trains, which is run by Virgin Group and SNCF.

A similar but separate case was also brought forward by Arriva, owned by Deutsche Bahn, but was settled in a confidential agreement with the DfT.

The Ruling

Addressing judges, Stagecoach lawyer Jason Coppel said the Railway Pensions Scheme was “in crisis”, and accused the DfT of accepting bids which failed to explain how the bidder would cover the deficit. He described the risks that bidders were expected to take on as disproportionate, and called on the government to provide aid.

However, on June 17, 2020, jMr Justice Stuart-Smith concluded that the DfT had not acted unlawfully, and ruled that all bidders “should and would have realised that material non-compliance on pensions gave rise to a serious risk of principled disqualification”.

While he accepted that there was uncertainty around the outcome of the new regulations, he did not accept that it was impossible to reach a commercial estimate of the attached risk.

His decision was based on the notion that the Department had an obligation to treat all bidders in the competition fairly. He stated that there was no indication, and no reason to believe that the terms proposed by the Government “were anything other than final or that they invited counter-proposals… In view of the Department’s duties of transparency and equal treatment, we do not see how the Department could properly have come to any decision other than to reject your Bid for non-compliance. Nor can I accept that uncertainty of outcome engaged the principle of transparency so as to render the imposition of the risk upon the franchisees unlawful.”

Although Stagecoach said it accepted the court’s decision, a spokesman added: “We believe there were important issues which needed to be determined by the court to help secure the future of the country’s rail system and our view remains that we were right not to accept the risks in these contracts.”