The Foreign Office has been censured by three senior judges for lacking fairness, candour and openness.
They were hearing a case where foreign fishing boats were said to be favoured over UK-flagged vessels.
It now faces a £3 million bill for refusing to allow a British-registered vessel to fish in the Falkland Islands last year.
Lord Justice Laws, throwing out an appeal by the Foreign Secretary after his ban was quashed in the High Court, said: "The history of the case has demonstrated to my mind that the approach taken to the public decisions that had to be made fell unhappily short of the high standards of fairness and openness which is now routinely attained by British government departments."
Quark Fishing Ltd, a Falkland Islands company, brought the case against the Foreign Office when the then Secretary of State Robin Cook stopped their vessel, the Jacqueline, from catching the highly-profitable toothfish in the South Atlantic in 2001. The Jacqueline, which fishes under the flag of the Falklands, had been licensed to fish the maritime zone controlled by the UK between 1997-2000 and this year.
Each of the years the vessel had been allowed to fish, it hauled in annual catches of the Patagonian Toothfish, sometimes known as white gold, approaching the 400-ton limit and worth £2.5 million.
Now the Foreign Office faces a damages action in the High Court in London for the lost catch and must pay the estimated £500,000 legal costs of the case which began last year before the Chief Justice of the South Georgia and South Sandwich Islands in Stanley, capital of the Falklands.
The Foreign Office eventually took the case to the Court of Appeal where it has failed to overturn the High Court decision and attracted severe criticism from the judges.
Source Ananova
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