Bank Mellat v Her Majesty’s Treasury [2013] UKSC 38 & [2013] UKSC 39

Bank Mellat, an Iranian commercial bank, challenged a Treasury order restricting its access to UK financial markets due to alleged connections with Iran's nuclear weapons programme. The Supreme Court allowed the appeal, finding the order was both procedurally unfair for lack of prior consultation and substantively disproportionate as it arbitrarily singled out Bank Mellat from comparable Iranian banks.

Facts

Bank Mellat, a major Iranian commercial bank, was designated under the Financial Restrictions (Iran) Order 2009 made pursuant to Schedule 7 of the Counter-Terrorism Act 2008. The order required all UK financial institutions to cease business relationships with Bank Mellat, effectively shutting the bank out of the UK financial sector. The Treasury’s stated justification was that Bank Mellat had provided banking services to entities connected with Iran’s nuclear weapons and ballistic missile programmes, including Novin Energy Company, a UN-designated entity.

Bank Mellat had substantial international business transacted through London, issuing letters of credit worth approximately US$11 billion annually, with about a quarter representing UK business. The order caused estimated revenue losses of US$25 million per year and prevented the bank from accessing €183 million in deposits with its UK subsidiary.

Issues

Procedural Ground

Whether the Treasury was required to give Bank Mellat an opportunity to make representations before making the order, either at common law or under Article 6 ECHR and Article 1 Protocol 1.

Substantive Grounds

Whether the decision was irrational, disproportionate and discriminatory in singling out Bank Mellat from other Iranian banks, and whether the Treasury’s reasons were vitiated by irrelevant considerations or mistakes of fact.

Judgment

Majority on Procedural Issue (Lords Sumption, Hale, Kerr, Clarke, Neuberger and Dyson)

The majority held that fairness required the Treasury to consult Bank Mellat before making the direction. Lord Sumption stated:

“The duty to give advance notice and an opportunity to be heard to a person against whom a draconian statutory power is to be exercised is one of the oldest principles of what would now be called public law.”

The direction was a targeted measure directed at just two specific companies. It came into effect almost immediately and had serious, potentially irreversible effects on Bank Mellat’s business. There were no practical difficulties preventing consultation, and the direction was based on specific factual allegations capable of being refuted and within the Bank’s special knowledge.

Majority on Substantive Issue (Lords Sumption, Hale, Kerr, Clarke and Carnwath)

Lord Sumption applied the four-part proportionality test: whether the objective justifies limiting a fundamental right; whether the measure is rationally connected to the objective; whether a less intrusive measure could have been used; and whether a fair balance has been struck.

The majority found the distinction between Bank Mellat and other Iranian banks was arbitrary and irrational:

“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.”

Mitting J had found that Bank Mellat had conscientiously operated procedures to avoid providing services to designated entities, and had terminated relationships once entities were designated. The Treasury’s justification shifted from alleging specific problems with Bank Mellat to relying on general risks inherent in international banking.

Dissenting Judgments

Lords Hope and Reed dissented on both issues, while Lords Neuberger and Dyson dissented on the substantive issue only. Lord Reed emphasised the wide margin of appreciation appropriate in matters of national security and nuclear proliferation, and found there was rational connection between the direction and its objective.

Implications

This case establishes important principles regarding procedural fairness in the exercise of draconian statutory powers, particularly where targeted at specific individuals or entities. Even where legislation provides for parliamentary approval and subsequent judicial review, the common law duty to consult before making such decisions may still apply.

On proportionality, the case demonstrates that measures must not arbitrarily single out particular persons where the problem identified is generic, and that the justification advanced to Parliament must align with that subsequently defended in court. The decision provides significant guidance on the application of proportionality analysis in cases engaging national security considerations while also affecting property rights.

Verdict: Appeal allowed. The Treasury’s decision to make the direction was set aside and the Financial Restrictions (Iran) Order 2009 was quashed. The majority found the direction unlawful both for procedural unfairness (lack of prior consultation) and on substantive grounds (disproportionate and arbitrary in singling out Bank Mellat from comparable Iranian banks).

Source: Bank Mellat v Her Majesty's Treasury [2013] UKSC 38 & [2013] UKSC 39