Bank Mellat v HM Treasury (No 2)

The Supreme Court considered the legality of a Treasury direction under Schedule 7 to the Counter-Terrorism Act 2008 which required UK financial institutions to cease business with Bank Mellat. The court analysed both the substantive lawfulness of the direction (applying principles of rationality and proportionality, including paragraph 9(6) of Schedule 7) and the procedural fairness of the decision (whether the bank should have been given prior notice and an opportunity to make representations). The majority concluded the direction was unlawful because the Treasury failed to afford Bank Mellat an opportunity to make representations before the order was made and, on the substantive analysis, a majority also found the direction to be disproportionate and irrational in its incidence. The court held that statutory avenues for later challenge under section 63 and Parliamentary scrutiny did not displace the common law duty to consult in circumstances of this kind.

Background and procedural posture:

• Bank Mellat applied under section 63 of the Counter-Terrorism Act 2008 to set aside a Treasury direction implemented by the Financial Restrictions (Iran) Order 2009 (SI 2009/2725). The direction, made under Schedule 7 para 13, required persons operating in the UK financial sector not to enter into or continue any transaction or business relationship with Bank Mellat.
• The High Court (Mitting J) dismissed the application; the Court of Appeal ([2011] EWCA Civ 1) dismissed the appeal (majority). Bank Mellat appealed to the Supreme Court.

Nature of the claims and issues:

• The bank advanced procedural grounds (that it should have been given prior notice and an opportunity to make representations at common law and under the Convention) and substantive grounds (that the direction was irrational, disproportionate, discriminatory and inadequately reasoned; that it failed paragraph 9(6) of Schedule 7).

Issues framed by the court:

1. Whether the Treasury was obliged to give Bank Mellat advance notice and an opportunity to make representations before making the direction.
2. Whether the direction was lawful on substantive grounds: rationality and proportionality in light of the statutory purpose (Schedule 7 para 1(4) and para 9(6)) and Convention rights (Article 1, Protocol 1 and Article 6).

Court’s reasoning and outcome:

• On procedure the majority (led by Lord Sumption, with Lady Hale, Lord Kerr and Lord Clarke agreeing) held that fairness required prior consultation in this case. The court concluded that section 63 and Parliamentary approval were not a sufficient substitute for an opportunity to be heard before the direction was made in circumstances where the measure was targeted, immediate in effect, and founded on specific factual allegations largely within the bank’s knowledge.
• On substance the majority (same judges) concluded that, taken together with the statutory proportionality requirement in paragraph 9(6) of Schedule 7, the singling out of Bank Mellat from other Iranian banks was irrational and disproportionate to the contribution the direction could reasonably be expected to make to the statutory objective. Other Justices dissented in part on the substantive point, accepting a wider margin of judgment for the Treasury and upholding the direction as rational and proportionate.
• The effect of the decision was to allow the appeal, set aside the Treasury's decision to make the direction and quash the order giving effect to it.

This was an appeal against a Treasury direction under Schedule 7 to the Counter-Terrorism Act 2008. The Supreme Court allowed the appeal and quashed the order. The majority held that (i) the Treasury was obliged, in the circumstances of this targeted, immediately effective and fact-specific measure, to give Bank Mellat prior notice and an opportunity to make representations and (ii) the direction was, on the majority view, disproportionate and irrational in its incidence (failing the statutory proportionality requirement in paragraph 9(6) of Schedule 7). The court ruled that the availability of section 63 judicial review and Parliamentary approval did not suffice to displace the common law duty of prior consultation in such a case.

High Court (Mitting J) dismissed Bank Mellat's application; Court of Appeal [2011] EWCA Civ 1 dismissed the appeal (majority); appeal to the Supreme Court [2013] UKSC 39 which allowed the appeal and quashed the Order.