Executive decisions, judicial supervision

Projects portrait1A group of local authorities in South Yorkshire and Merseyside last month narrowly lost a Supreme Court battle over the Government's allocation of EU funds. Nicholas Dobson considers the lessons to be learned.

By a 4-3 majority the Supreme Court has rejected a challenge by authorities in South Yorkshire and Merseyside to the regional distribution by the Secretary of State for Business, Innovation and Skills of EU structural funds for the period 2014-2020. The majority were Lords Neuberger, Sumption, Clarke and Hodge with Lords Mance and Carnwath and Lady Hale dissenting.

But although Lord Neuberger "would have hoped for a more sophisticated . . . considered, and a more consultative, approach to the question of how to apportion such a large sum of money between different regions of the United Kingdom", he nevertheless concluded (albeit "with some hesitation") that the appeal should fail.

The case in question was R (Rotherham Metropolitan Borough Council and others) v. Secretary of State for Business, Innovation and Skills [2015] UKSC 6), the decision in which was handed down on 25 February 2015. In the course of the judgments there were some interesting observations about the nature and reach of judicial supervision when reviewing decisions of the Executive, particularly in political and constitutional contexts. For despite the rather complex factual matrix (at least to those not practised in the cabalistic arts of EU finance) those were the crux issues.

Summary background

The EU funding allocation to the UK for 2014-2020 represented a 5% decrease in that for the previous period and the Secretary of State had to decide how to allocate it which he approached in two stages. The first covered the distribution of the national reduced allocation between the four component UK countries and the second covered allocations to regions within each country. To limit so far as possible the scope for disruptive change, his approach was to assess the allocation for each country or regions by reference to its funding allocation for the previous period.

As to the first decision, each country’s allocation was to be reduced by 5%. Regarding the second, ‘transition regions’ including those of the Appellant authorities (i.e. those having a GDP per capita between 75% and 90% of the EU average) were to receive an allocation per year for the current funding period representing an increase of 15.7% (at 2011 prices) on their allocation for 2013 - the last year of the previous funding period. Conversely, Highlands & Islands (the only similar Scottish region) was to receive an allocation per year of 95% of its average annual allocation over the whole of the previous funding period. The Secretary of State’s proposals were approved by the EU Commission.

In essence the authorities in question objected to the reduction in their particular EU structural funding allocation for the period 2014-2020. This was because, although their funding was actually to increase by 15.7% from the base year of 2013 selected by the Secretary of State, this actually resulted in a 61% reduction on that for the previous period.

In simplified summary, the reason was that, since the Appellant authorities had moved above the 75% GDP threshold in the previous funding period, they had received certain transitional relief funding which had tapered down and expired in 2011. This transitional funding had consequently given Merseyside and South Yorkshire substantially more money than other regions with GDP above the 75% EU average threshold. However, since other transition regions had during the previous period a flat funding allocations profile, Merseyside and South Yorkshire contended that they fared worse than other transition regions, despite having higher levels of deprivation than most of them. They consequently argued that their funding should have been based not on 2013 (where there had been no additional financial relief funding) but on the previous allocation period as a whole which included had the transitional relief in question.

In addition, the authorities complained that they had fared badly compared with the Highlands and Islands and Northern Ireland. For the Secretary of State had allowed them 95% of their allocations for the previous funding period. But, despite the fact that Highlands and Islands had also had part of its allocation as transitional relief tapering down to zero over the period, it had been allowed to base its calculation on the average annual allocation in the previous period. The Appellants said this meant that they had fared worse than other similar regions despite having higher levels of deprivation than most of them.

Lord Neuberger indicated that the essence of the Appellants’ attacks upon the material decisions of the Secretary of State, "is that the process adopted by the Secretary of State and/or the outcome of that process was unlawful on the grounds that it was: (i) not in accordance with. . . [EU 1303/3013 – the Regulation]. . . and/or (ii) so unreasonable as to be unlawful". This was on the basis of breach of EU principles of equality or proportionality and/or breach of domestic public law principles.

Supreme Court decision

Lord Sumption noted that in contrast to the allocation of structural funds amongst member states which is prescribed in detail by the Regulation, "there is no formula for the allocation of funds among regions within Member States". Instead there is "a detailed administrative procedure for arriving at the internal regional allocations under a scheme of shared management involving the Commission, the Member States, and local entities".

Before dealing with substantial issues he made three preliminary points. Firstly, the Secretary of State’s allocation (although amenable to judicial review) is a discretionary decision of a kind which the courts have been traditionally reluctant to disturb. There was no ‘right’ answer prescribed by the EU Treaty or the Regulation as to how EU Structural Funds were to be distributed within a Member State. Secondly the "complex evaluation of a wide range of overlapping criteria" was a "judgment of a particularly delicate kind" requiring arbitration "between different public interests affecting different parts of our community." An exercise, in fact, in which "the legitimacy of the decision-making processes depends to a high degree on the fact that ministers are answerable politically to Parliament".

The third point is that the disputed allocations were embodied in a partnership agreement made with the EU Commission acting as the relevant organ of the EU. And this was agreed by the Commission "shortly after this appeal was argued". This was not to say that the present issues are outside the scope of judicial review. However, a national court should be "extremely cautious" before accepting that a proposal is outwith the Regulation when the Commission charged with applying it has found it to be consistent with them.

For Lord Sumption the key question was whether there was enough of a relevant difference between Merseyside and South Yorkshire and the other transition regions to justify difference in their treatment. To succeed the Appellants would have to demonstrate something unlawful about the process or reasoning by which that outcome was reached.

As to the first decision, Lord Sumption considered that the Secretary of State was entitled to have regard to the UK constitutional settlement providing (i) he did not unjustifiably discriminate between the four component countries and (ii) that the financial implications for the individual UK regions were consistent with the Regulation. He took the view that the first decision was within the Secretary of State’s margin of judgment in both respects. There was no material before the Court to suggest that the relative positions of the component countries had changed so radically since the last funding period that a distribution between them proportionate to their previous allocation could be regarded as in itself discriminatory.

Regarding the second decision Lord Sumption found it difficult to see what else the Secretary of State could have done, bearing in mind that the distribution of regional funding is a zero-sum game with one region’s gain being another’s loss. Consequently, since the fund available for transition regions is ring-fenced the additional cost of providing Merseyside and South Yorkshire with allocations based on the whole of the previous period would have left all of them with 22% less than the previous period instead of 15.7% more. The Secretary of State was entitled to conclude that this would be contrary to the purpose for which this category had been created. Furthermore, if he had based the 2014-2020 uplift on the average allocations for the whole of the previous period the effect would have been to have continued the impact of the previous transitional additional funding relief which would have represented a very significant difference between Merseyside and South Yorkshire and the other English transition regions.

As to the Highlands and Islands decision, insofar as this arose from the preferences of the Scottish Government, Lord Sumption considered that this was the natural and legitimate result of the decentralisation of the UK under its current constitutional settlement.  He also gave short shrift to the Appellants’ proportionality argument i.e. the Secretary of State’s decision imposed a ‘disproportionate burden’ upon them. He posed the question: "disproportionate to what?"

In Lord Sumption’s view, proportionality "is a test for assessing the lawfulness of a decision-makers choice between some legal norm and a competing public interest". But here "the only legal standard by which the treatment of Merseyside and South Yorkshire can be regarded as disproportionately onerous to them is provided by the terms of the . . . Regulation and the principle of equality". It follows that if the decisions were consistent with both, as Lord Sumption found them to be, there can be no question of disproportionality. In all the circumstances he dismissed the appeal.

As noted, Lord Neuberger agreed with the outcome, albeit somewhat more hesitantly. On the Court’s proper approach he noted that "courts have no more constitutionally important duty than to hold the executive to account by ensuring that it makes decisions and takes actions in accordance with the law. However, that duty must "be exercised bearing in mind that the executive is the primary decision-maker, and that it normally has the information, the contextual appreciation, the expertise and the experience which the court lacks". And the "weight to be given to such factors will inevitably depend on all the circumstances".

He agreed that the material decision of the Secretary of State "is in the 'classic territory' where the courts afford the decision-maker 'a wide margin of discretion'". And although the "line between judicial over-activism and judicial timidity is sometimes a little hard to tread with confidence. . . it is worth remembering that, while judicial bravery and independence are essential, the rule of law is not served by judges failing to accord appropriate respect to the primary policy-making and decision-making powers of the executive".

Lord Neuberger did note the absence of any prior consultation between the Secretary of State and individual regions. And whilst this would not have been determinative here, it would have assisted the Secretary of State’s case. He rejected the Appellant’s objection to the first stage decision, noting (amongst other things) that there "is no provision which expressly limits the freedom of a member state when deciding how to distribute its allocated funds between regions". This "renders it difficult to justify a substantial degree of constraint as to the manner of distribution".

But whilst there was "real force in the point" that the apportionment between the four component UK territories is arbitrary and inconsistent with the Regulation, nevertheless the decision to visit the reduction equally on those territories is "very much a policy. . .or a politically based decision, which is therefore particularly difficult for a court to evaluate and therefore to criticize and therefore to condemn". He therefore found that it could not be said to be contrary to the Regulation (particularly as that contained no express restriction as to how nationally allocated funds are distributed) nor could it be said to be irrational.

Lord Neuberger also rejected the attack on the distribution between English regions. Although he found force in the point that the use of the 2013 baseline deprived Merseyside and South Yorkshire of the uplift given to other northern regions, given (amongst other things) that the Secretary of State’s approach was reasonable in principle within the wide margin of discretion available, he also rejected this point. And as Stewart J had noted at first instance, if the Secretary of State had adopted the approach suggested by the Appellants it would have unduly advantaged them in relation to the other English transition regions.

As to the Highlands and Islands disparity, whilst this did give him "pause for thought" since many might well have taken the view that the disparities would have justified making adjustments or even reconsidering the whole methodology, nevertheless, bearing in mind the wide margin of discretion of the Secretary of State, Lord Neuberger did not consider that this justified concluding that the distribution scheme was unlawful. For particularly considering that "the apportionment of the UK allocated funds between the four territories of the UK was based on a high level political decision which is lawful in principle, it would require a compelling case on the outcome before a court could rule the decision unlawful in practice". And such a compelling case was not considered to have been made.

Lord Neuberger’s overall conclusion was that whilst the decision as to how to distribute UK allocated funds between the 37 regions ‘may have been unimpressive in some respects, it was not unlawful’.

Dissenting voices

Lord Mance (with whom Lady Hale agreed) considered (amongst other things) that in proceeding as he did the Secretary of State gave priority to irrelevant considerations (the maintenance in the 2014-2020 period of similar funding, less 5% for each UK territory to that which had applied in the previous period) which the re-categorisation of regions in the current period made inappropriate. He had also failed to treat like situations alike since Merseyside and South Yorkshire as transition regions were treated quite differently from Northern Ireland and Highlands & Islands (also transition regions) by taking 2013 as an appropriate funding base for all English transition regions, although it bore no relationship to the actual needs of Merseyside and South Yorkshire. He considered these to be "manifest flaws" outwith the "margin of discretion undoubtedly due when value judgments are in issue".

Lord Carnwath concluded "with some hesitation in view of the risk of over-simplification of some very complex issues and material" that "the criticisms made by the two regions of the decision-making process, including both decisions, have not been satisfactorily answered". For in his view whether "this is expressed as an issue of unequal treatment or lack of proportionality under European law, or inconsistency and irrationality under domestic law, the anomalies are in my view sufficiently serious to have required explanation which has not been given, and which renders the resulting decisions 'manifestly inappropriate' under EU and domestic principles".

Comment

Although the losing authorities will undoubtedly take comfort from the dissenting judgments, as with football it is goals that count. And the score was a clear 4-3 against the authorities. 

As mentioned, the majority judgments do contain some interesting observations on the proper scope of judicial discretion and activism, particularly within the context of decisions that are political in nature and to which a wide margin of appreciation should be afforded. However, the authorities in Merseyside and South Yorkshire clearly did not appreciate the decision made by the Secretary of State within the wide margin found to have been available to him.

Nicholas Dobson is a Consultant with Freeths LLP specialising in local and public law. He is also Communications Officer for Lawyers in Local Government. Nicholas can be reached on 0845 017 7620 or This email address is being protected from spambots. You need JavaScript enabled to view it..

© Nicholas Dobson

March 2015.