Capital Finance and Companies

July 30th, 2014 by James Goudie KC

A challenge by a number of local authorities from the South Yorkshire and Merseyside Regions to the decision of the Secretary of State for Business, Innovation and Skills (“the SoS”) to change the allocation of EU Structural Funds in a manner that was disadvantageous to them, having failed at first instance, R (Rotherham BC) v SoS [2014] EWHC 232 (Admin), (2014) LGR 389, save in relation to the PSED, has now failed in the Court of Appeal, [2014] EWCA Civ 1080.  In particular, the claimant authorities sought to challenge the allocation of EU Structural Funds for the period 2014-2020 as between the four countries of the United Kingdom, and as between the English regions.  Articles 174-178 of the Treaty on the Functioning of the European Union require the EU to promote its overall harmonious development and strengthen its economic, social and territorial cohesion by reducing disparities between the levels of development of the various regions through the Structural Funds.  The allocation of the Structural Funds is determined by EU Council Regulations and the authorities of the Member States.  In March 2013 the SoS took a decision, effectively, to allocate higher funding than previously to Northern Ireland, Scotland and Wales.  In a further decision in June 2013 allocations were reduced for South Yorkshire and Merseyside.  Overall, the claimant authorities suffered a substantial fall in funding.  They alleged that the two decisions by the SoS have produced discriminatory and disproportionate funding cuts for their Regions, and breached the EU law principles of equal treatment and proportionality. 

It was common ground that, in making the first and second decisions, the SoS was acting within the scope of EU law and that accordingly the EU law principles of proportionality and equal treatment apply.  It was also common ground that the “margin of discretion” allowed by EU law may be broad or narrow according to the circumstances of the case, in particular the identity of the decision-maker, the nature of the decision, the reasons for the decision and the effect of the decision. Of these factors, the Court of Appeal said, at para 54, that “the nature of the decision is usually the most important”.  The Court of Appeal considered, at para 56, that the margin of discretion was “a wide one in the circumstances of this case”.  They stated, at para 57:-

“In our view, the first and second decisions were plainly concerned with matters of high level policy and economic, social and political judgment.  They involved the making of choices as to funding allocations between the regions. … Even if the only objective was the reduction of the disparities between levels of economic development of regions, that would involve the making of complex assessments of their respective economic circumstances.  These are not hard-edged decisions which admit of clear and straightforward answers. … In our view, this is classic territory for affording the decision-maker a wide margin of discretion.  … the Court should only interfere if satisfied that the decisions were manifestly inappropriate or manifestly wrong.”

The Court of Appeal then proceeded to consider whether the decisions were disproportionate and/or irrational.  They concluded, at para 64, that they came nowhere near to being that.

Turning to equal treatment, the Court of Appeal observed that the equal treatment principle requires that comparable situations must not be treated differently and different situations must not be treated in the same way, unless such treatment is objectively justified.  The question in the case was whether there was a failure to treat like cases alike and unlike cases differently, or rather what margin of discretion (if any) should be afforded to the SoS in deciding whether different categories are like or unlike each other (“the comparability issue”).  The Court of Appeal said:-

“70.     … We see no reason in principle why the width of the margin of discretion in relation to a decision on comparability should be approached differently from any other decision made within the scope of EU law.  In other words, it may be broad or narrow according to the circumstances of the case and in particular the nature of the decision: … In a simple case of discrimination, there may be no margin of discretion at all in deciding the comparability issue.  … But some comparisons are less straightforward and are not so clear cut.  They may involve making complex evaluative judgments as to which there is real scope for differences of opinion.  In principle, the more complex and the more judgment-based the decision, the greater the margin of discretion should be afforded to the decision-maker.”

“72. … The context in which the first and second decisions were taken is critical to the intensity of the court’s review of them. … The Secretary of State was required to have regard to a number of different overlapping considerations, and the regulation does not prescribe the weight to be given to each of them. … the reduction of regional disparities does not involve a simple comparison of the development level and economic performance of one region with another.  … It is a complex exercise. It includes not only making comparisons of the economic performance of different regions, but also inter alia of their respective employment rates for different age groups, their respective conditions for research and development and their respective  greenhouse gas emissions.  Each of these comparisons might individually involve making judgments.  Overall, the exercise of comparing one region with another is or ought to be multi-factorial.  It involves making a substantial number of value judgments of an economic and social nature.  In our view, the decision-maker is entitled to a wide margin of discretion in making such a decision.”

The Court of Appeal expressed its overall conclusion on the equal treatment issues as follows, at paragraph 86:-

“… For the reasons already given, the Secretary of State was entitled to a wide margin of discretion in deciding questions of comparability.  We agree with the judge that the court should only interfere if a high standard of unreasonableness is met.  The evidence of Dr Baxter shows that the Secretary of State approached the task of allocating the funds in a careful and systematic way and had particular regard to the relative position of the different regions.  He gave particular consideration to the position of Merseyside and South Yorkshire.  We are satisfied that the high threshold for interference by the court has not been crossed in this case.”

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