Bank Mellat v Her Majesty's Treasury

[2013] UKSC 39

Introduction

Bank Mellat (the "Bank"), an Iranian bank, appealed against the Court of Appeal's decision ([2011] EWCA Civ 1) to uphold measures taken by HM Treasury to restrict its access to financial markets in the United Kingdom. The Supreme Court found in favour of the Bank in a judgment which emphasises that where a public body's decision has an immediate and substantial impact on a targeted person's assets, it has a duty to consult the affected entity and it must provide clear evidence that its decision is proportionate to its objective.

Key points

  • Where a decision by a public body engages the human rights of applicants, the requirements of rationality and proportionality inevitably overlap and the appropriate test is the common law test of proportionality.
  • A public body must provide cogent evidence as to why it has singled out a person for particular treatment in its decision and not others who appear to be in a similar position.
  • The common law duty of consultation depends on the particular circumstances in which a public body's decision is made; where a decision significantly and immediately impacts the business of an affected person the courts are likely to find that fairness requires a duty to consult.

Background

On 9 October 2009, the Treasury made a direction under Schedule 7 of the Counter-Terrorism Act 2008 (the "Act") prohibiting all persons operating in the UK financial sector from having any commercial dealings with the Bank or its UK subsidiaries (the "Direction"). The restriction was imposed because the Bank had been identified as having assisted Iran's nuclear weapons programme by providing banking and financial services to entities that the United Nations identified as having been involved in Iran's nuclear industry. The Act sets out three safeguards: (1) a direction must be laid before Parliament after being made and unless approved by affirmative resolution within 28 days will cease to have effect thereafter; (2) a direction must be proportionate having regard to the risk to the national interest presented by, in this case, nuclear proliferation; and (3) any person affected by a direction may apply to the High Court to set it aside.

Following approval by Parliament, the Bank applied under section 63 of the Act to set aside the Direction on both substantive and procedural grounds. The Bank argued that the Direction was irrational, disproportionate and discriminatory; the Treasury had failed to give adequate reasons for making the decision and/or its reasons were vitiated by irrelevant considerations or mistakes of fact. The Bank also contended that the Treasury had failed to give it an opportunity to make representations before making the Direction, as required by common law and by the European Convention on Human Rights 1950 ("ECHR") Article 6 (the right to a fair hearing) and Article 1, Protocol 1 (the right to protection of property and possessions).

The High Court and the Court of Appeal dismissed the Bank's appeals under both heads.

Supreme Court Judgment

The Supreme Court allowed the Bank's appeal on the substantive grounds by a majority of 5 to 4 and on the procedural grounds by a majority of 6 to 3. It accordingly set aside the Direction and quashed the order giving effect to it.

The substantive grounds of challenge

According to Lord Sumption (who gave the leading judgment), the essential question raised by the Bank's substantive objections to the Direction was whether the interruption of commercial dealings with the Bank in the UK's financial markets bore some rational and proportionate relationship to the statutory purpose of hindering the pursuit by Iran of its weapons programmes. Lord Sumption noted that the requirements of rationality and proportionality, as applied to decisions engaging the human rights of applicants, inevitably overlap and therefore it was necessary to adopt the common law test of proportionality (as opposed to the EU/ECHR formulations).

The common law test requires consideration of (i) whether [the public body's] objective is sufficiently important to justify the limitation of a fundamental right; (ii) whether it is rationally connected to the objective; (iii) whether a less intrusive measure could have been used; and (iv) whether, having regard to these matters and to the severity of the consequences, a fair balance has been struck between the rights of the individual and the interests of the community. (De Freitas v Permanent Secretary of Ministry of Agriculture, Fisheries, Lands and Housing [1999] 1 AC 69; Huang v Secretary of State for the Home Department [2007] 2AC 167; R v Oakes [1986] 1 SCR 103)

The adoption of the test was approved by all of their Lordships, but they disagreed as to how it should be applied, with the minority arguing that the Government should be afforded a wider margin of appreciation. The majority held that the Direction was irrational in its incidence and disproportionate to any contribution which it could rationally be expected to make to its objective for two reasons:

  1. the justification for the Direction found by the High Court and Court of Appeal was not the one which Ministers advanced when laying the Direction before Parliament and was in some respects inconsistent with it; and
  2. in the absence of cogent specific allegations, it was unclear why the Bank had been singled out; the problem was not specific to the Bank but an inherent risk of banking and the risk posed by the Bank's access to the UK markets was no different from that posed by the access which comparable banks continued to enjoy.

The procedural grounds of challenge

Lord Sumption held that unless the Act expressly or impliedly excluded any relevant duty of consultation, or in the particular case consultation would be impractical or frustrate the object of the Direction, fairness required that a person specifically targeted by it should have an opportunity to make representations. Consultation with the Bank before the Direction was made was held to be required as a matter of fairness and good administration because:

  1. the measure was targeted and had serious effects on the Bank's business – it deprived the Bank of the effective use of the goodwill of its English business and of the free disposal of substantial deposits;
  2. it came into effect almost immediately, and continued to be in effect for up to 28 days before receiving Parliamentary approval;
  3. there were no practical difficulties in the way of an effective consultation exercise as the Bank was one of only two parties that the Treasury was required to consult; and
  4. the Direction was not based on general policy considerations, but on specific factual allegations of a kind plainly capable of being refuted, being for the most part within the special knowledge of the Bank.

Lord Sumption noted that the duty of fairness in general and prior consultation in particular was not excluded by the detailed procedural scheme laid out by the Act which made no provision for representations to be made, specifically:

  1. the statutory right, under section 63 of the Act, of recourse to the High Court after the making of a direction; and
  2. the fact that the Direction was subject to the affirmative resolution procedure.

On the first point, Lord Sumption noted that (i) section 63 largely reproduces the rights of judicial review which a person affected by the Direction would have had regardless; (ii) the right of recourse was insufficient, given the Direction came into immediate effect and by the time it had been set aside the impact on the Bank's goodwill may have been substantial and potentially irreversible; and (iii) the right to consult would not have frustrated the purpose of the statutory scheme as the Direction did not rely on the ability to be able to "strike without warning".

On the second point, the majority agreed that the affirmative resolution procedure does not preclude the courts from reviewing the circumstances in which secondary legislation, such as the Direction, was passed where it is targeted at "designated persons". The Direction was made by the Minister who was empowered under the enabling Act to make it and this was not altered by the fact that it required Parliamentary approval.

Commentary

The Supreme Court's judgment suggests that for a public body to satisfy the courts that a measure is rationally connected (i.e. proportionate) to its objective, it is insufficient to argue that by imposing the measure on a person it goes someway to furthering the objective if it can be shown that others in the person's peer group (in this case, other Iranian banks) have not been subjected to the same restrictions. Instead, there must be cogent reasons for singling out one person.

However, it is important to note that proportionality has still not been recognised as a free-standing ground for judicial review in cases which do not engage rights protected under the Human Rights Act 1998 or EU law and therefore this case has limited application. Where a matter falls outside the ambit of the 1998 Act or EU law, courts can only substantively examine a decision for Wednesbury unreasonableness. This is a less intensive test that is unlikely to require the same standard of evidence, as a decision can only be challenged if it is "so unreasonable that no reasonable authority could ever have come to it" (Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1947] EWCA Civ 1).

Furthermore, the Supreme Court has confirmed that fairness requires, before a decision is made, that a person specifically targeted by a decision should have an opportunity to make representations, even where a statute does not explicitly confer such a duty. The immediate and substantial impact on the Bank's assets and goodwill appear to have been material to this decision. The judgment also indicates that it will be difficult for a public body to argue that a statute has impliedly excluded the duty to consult. However, their Lordships' judgment is heavily caveated; it states that the right to be consulted is available for those against whom a "draconian statutory power is to be exercised", and that this duty will not arise if it is impractical or frustrates the object of the decision. This judgment therefore does not guarantee that the courts will always imply a duty of prior consultation - it will very much depend on the specific circumstances of the case.