Monday, 24 June 2013

First Principles: Substantive and Procedural Review on the UKSC

The decision of the UK Supreme Court in Bank Mellat v Her Majesty's Treasury (No. 2) [2013] UKSC 39 is not exactly ground-breaking as a matter of law, and is certainly the poor relation of Bank Mellat (No. 1), UKSC 38 (see e.g. here), but it is nonetheless a very interesting case on the application of the general principles of administrative law.

The Bank was suspected by the Treasury of involvement in the financing of Iran's nuclear programme. By way of statutory instrument, its operations in the UK were essentially suspended, with predictably dire consequences. The Bank claimed it knew nothing of Iran's nuclear programme and had done nothing to contribute to its furtherance.

A challenge was brought on substantive and procedural grounds. Substantively, the statutory instrument was claimed to be irrational and disproportionate. Procedurally, the statutory instrument was argued to violate the common law principles of procedural fairness, as well as those enshrined in the European Convention on Human Rights. Both challenges were accepted by a majority of the judges.

Substantively, Lord Sumption concluded that the statutory instrument was problematic. The Treasury's position had shifted over the course of the litigation to focus on the Bank's quality as an unwitting participant in the financing of Iran's nuclear programme rather than an active player.

But fundamentally, there was no reason to single out Bank Mellat. If banks were the unwitting dupes of malevolent financiers, that problem was inherent to international banking, not unique to a single bank:
  1. I would not go so far as to say that the Schedule 7 direction in this case had no rational connection with the objective of frustrating as far as possible Iran's weapons programmes. On the footing that a precautionary approach is justified, the elimination of any Iranian bank from the United Kingdom's financial markets may well have added something to Iran's practical problem in financing transactions associated with those programmes, just as the incarceration of some potential terrorists under Part IV of the Crime and Security Act 2001 may have made some difference to the reduction of terrorism. But I think that the distinction between Bank Mellat and other Iranian banks which was at the heart of the case put to Parliament by ministers was an arbitrary and irrational distinction and that the measure as a whole was disproportionate. This is because once it is found that the problem is not specific to Bank Mellat but an inherent risk of banking, the risk posed by Bank Mellat's access to those markets is no different from that posed by the access which comparable banks continued to enjoy. Moreover, the discriminatory character of the direction must drastically reduce its effectiveness as a means of impeding the Iranian weapons programmes. As the Exchequer Secretary herself pointed out, "as long as all financial sanctions and relevant risk warnings are complied with, alternative banks may be used." Nothing in the Treasury's case explains why we should accept that it is necessary to eliminate Bank Mellat's business in London in order to achieve the objective of the statute, if the same objective can be sufficiently achieved in the case of comparable banks by requiring them to observe financial sanctions and relevant risk warnings. It may well be that other Iranian banks have not been found to number among their clients entities involved in Iran's nuclear and ballistic missile programmes. But it follows from the fact that this is a problem inherent in the conduct of international banking business that they are as likely to do so as Bank Mellat. The direction was irrational in its incidence and disproportionate to any contribution which it could rationally be expected to make to its objective. I conclude that that it was unlawful. (My emphasis)
On proportionality in general, Lord Reed's lengthy discussion of proportionality at paras. 68-82 reflects the majority view. There is an interesting suggestion at para. 82 that Parliament should be taken to be aware of the modern law on proportionality: the reference to proportionality in the statute was taken to import the common law, as developed by reference to English, Canadian and European law (in both its EU and ECHR guises).

Lord Sumption's conclusion on the substantive challenge was ably questioned by Lord Reed:
  1. Lord Sumption states that other Iranian banks were as likely as Bank Mellat to number entities involved in Iran's nuclear and ballistic missile programmes amongst their clients. As I have explained, Mr Robertson acknowledged at para 74 of his statement that entities involved in Iran's nuclear weapons programme could in principle use other Iranian banks. He pointed out however that the order might lead the UK banking sector to wind down business with Iran generally, and that the order would in any event make transactions involving the UK more difficult. That was because it was difficult for Iranian banks to access UK financial markets directly, since UK banks were reluctant to deal with them. The exceptions were the small number of Iranian banks which had UK subsidiaries. Those were Bank Melli, Bank Sepah, Bank Saderat and Bank Mellat. As I have explained, the UK subsidiaries of Bank Melli and Bank Sepah were already subject to asset freezing orders. The order under challenge applied to Persia International Bank plc ("PIB"), which was the UK subsidiary of Bank Mellat. The UK subsidiary of the remaining Iranian bank with such a subsidiary, Bank Saderat, was subject at the time to systematic reporting requirements under Regulation 1110/2008, as I have explained. Subsequent to the making of the order under challenge, it was subjected to an asset freeze.

  2. In these circumstances, an order directed specifically against Bank Mellat and its UK subsidiary was far from being pointless or arbitrary. One effect of the order was to prevent the only UK subsidiary of an Iranian bank which was not already subject to controls, namely PIB, from dealing with its parent, Bank Mellat. Lord Sumption notes that PIB was not prevented from dealing with its minority shareholder, Bank Tejarat. There is however nothing to indicate that Bank Tejarat had any involvement with entities involved in the Iranian nuclear weapons programme. If information indicating such involvement were to emerge, no doubt action would be taken. In the event, PIB's assets were subsequently frozen by Council Regulation (EU) 668/2010, made on 26 July 2010. Although Iranian banks, or Iranian entities involved in the nuclear weapons programme, could in principle seek to use non-Iranian international banks, those could be expected to have compliance mechanisms in place: it was only in relation to Iran that the absence of such mechanisms had caused the FATF to call for preventive measures.
Procedurally, the statutory instrument was also flawed, in the eyes of a majority of the Court, for a failure to give adequate notice to Bank Mellat before the making of the statutory instrument. Lord Neuberger laid out the general principles with admirable clarity:
  1. In my view, the rule is that, before a statutory power is exercised, any person who foreseeably would be significantly detrimentally affected by the exercise should be given the opportunity to make representations in advance, unless (i) the statutory provisions concerned expressly or impliedly provide otherwise or (ii) the circumstances in which the power is to be exercised would render it impossible, impractical or pointless to afford such an opportunity. I would add that any argument advanced in support of impossibility, impracticality or pointlessness should be very closely examined, as a court will be slow to hold that there is no obligation to give the opportunity, when such an obligation is not dispensed with in the relevant statute.
The disagreement between the judges turned on the application of these two principles to the facts of the case (compare for example Lord Hope at paras. 146-153 and Lord Neuberger at paras. 182-192).

But there was no doubt that the mere character of the statutory instrument was enough to oust procedural protections (or substantive review, for that matter). As Lord Sumption put it:
  1. The present case, however, is entirely different. In point of form, a statutory instrument embodying a Schedule 7 direction is legislation. But, as Megarry J observed in Bates v Lord Hailsham of St. Marylebone [1972] 1 WLR 1373, the fact that an order takes the form of a statutory instrument is not decisive: "what is important is not its form but its nature, which is plainly legislative" (page 1378). The Treasury direction designating Bank Mellat under Schedule 7, paragraph 13, was not legislative in nature. There is a difference between the sovereign's legislation and his commands. The one speaks generally and impersonally, the other specifically and to nominate persons. As David Hume pointed out in his Treatise of Human Nature (Book III, Part ii, sec 2-6), "all civil laws are general, and regard alone some essential circumstances of the case, without taking into consideration the characters, situations and connexions of the person concerned." The Treasury direction in this case was a command. The relevant legislation and the whole legislative policy on which it was based, were contained in the Act itself. The direction, although made by statutory instrument, involved the application of a discretionary legislative power to Bank Mellat and IRISL and nothing else. It was as good an example as one could find of a measure targeted against identifiable individuals. Moreover, as I have pointed out in dealing with the Bank's substantive complaints, it singled out Bank Mellat from other Iranian banks on account of the Bank's conduct or, in Hume's words, its "characteristics, situations and connexions". It directly affected the Bank's property and business assets. If the direction had not been required to be made by statutory instrument, there would have been every reason in the absence of any practical difficulties to say that the Treasury had a duty to give prior notice to the Bank and to hear what they had to say. In a case like this, is the position any different because a statutory instrument was involved? I think not. That was simply the form which the specific application of this particular legislation was required to take. (My emphasis)
This raises a point of particular interest in a Canadian context. I am currently writing (in French) a practitioner-oriented piece on Legality. One of the questions is whether regulations are subject to review for reasonableness (see also my post here). The best Canadian authority says no, but as a matter of principle, this seems wrong. Indeed, in Catalyst Paper, a case involving the reasonableness of municipal regulations, the Court issued a statement of principle not limited to local government: "The delegating legislator is presumed to intend that the authority be exercised in a reasonable manner" (at para. 15). That sweeps in all regulations, not just municipal by-laws.

In this regard, the following passage from Lord Sumption's speech is most enlightening:
  1. These statements seem to me to be correct in principle. If a statutory power to make delegated legislation is subject to limitations, the question whether those limitations have been observed goes to the lawfulness of the exercise of the power. It is therefore reviewable by the courts. In principle, this applies as much to an implied limitation as to an express one, and as much to a limitation on the manner in which the power may be exercised as it does to a limitation on the matters which are within the scope of the power. The reason why this does not intrude upon the constitutional primacy of Parliament is not simply that delegated legislation, however approved, does not have the status of primary legislation. It is that a statutory instrument is the instrument of the minister (or other decision-maker) who is empowered by the enabling Act to make it. The fact that it requires the approval of Parliament does not alter that. The focus of the court is therefore on his decision to make it, and not on Parliament's decision to approve it. If that is true (as I think it is) as a matter of general principle, it is particularly true of the statutory judicial review for which section 63 of the Counter-Terrorism Act provides. Under section 63(2) the application is to set aside a "decision of the Treasury". The relevant decision of the Treasury is the decision under Schedule 7, paragraph 1 to "give a direction". If the court sets aside that decision, it is then required by section 63(4) to quash the resulting order. (My emphasis)
Doubtless any such argument would be difficult to make out. In principle, however, it ought to be available.

As an illustration of some fundamental principles of administrative law, Bank Mellat (No. 2) is a very useful decision, though likely to be largely overshadowed by Bank Mellat (No. 1)

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