High Court considers regulatory rights of appeal

The post below was first published on our Public Law notes blog:

In R (Suez Recycling and Recovery UK Ltd) v Environment Agency [2023] EWHC 3012 (Admin) the High Court considered the routes by which environmental permit holders can challenge adverse Compliance Assessment Reports (“CARs“) issued by the Environment Agency (“the Agency“). The Court found in favour of the Claimant, waste company Suez Recycling and Recovery UK (“Suez“), on the first of six issues.

The Agency will now need to consider introducing a new merits appeal route to enable permit holders to challenge the merits of adverse CARs, having previously only offered an internal complaints procedure involving a supervisory review. If the Agency decides not to introduce the new merits appeal route, the Court has made clear that the Agency will need to record that decision, together with reasons.

Key points

• Section 2.3 of the Regulators Code 2014 (“the Code“) states that regulators should provide an impartial and clearly explained route to appeal against regulatory decisions. There had been a material error of law in the Agency’s interpretation of the term “regulatory decision”. Properly interpreted, the term is broader than the Agency had understood it to be.
• Regulators are permitted to depart from the Code, including section 2.3, where on the basis of material evidence they consider it is not applicable or outweighed by other relevant considerations. The regulator must take that decision consciously and record it, together with reasons. The Agency had not done so in this case.
• The “famously context-specific” common law standards of procedural fairness do not require that permit holders have a general entitlement to a merits appeal route in respect of each and every regulatory decision. The requirements of common law procedural fairness depend on the facts and circumstances of the particular case.

Background

CARs

The Agency uses CARs when assessing environmental permit holders’ compliance with permits. CARs are prepared by Agency officers to record the findings of site inspections, audits and monitoring activities and to notify permit holders of any breaches of the conditions in their permits. Where there has been a breach, CARs contain a compliance score and state any action that the Agency is considering taking.

At the end of each calendar year, the Agency uses a permit holder’s compliance score(s) to calculate the annual subsistence payment that a permit holder must pay the Agency. The subsistence payment is designed to reflect the regulatory interventions and effort applied by the Agency in respect of the permit in the relevant year.

The CARs issued to Suez

This case concerned two adverse CARs issued by the Agency in August 2020 in respect of Suez’s Byker reclamation plant (“the Plant“). Suez’s operation of the Plant is regulated by the Agency pursuant to a permit. The CARs recorded breaches of the conditions of the permit which required Suez to control odour levels at the Plant. The compliance scores recorded led to a 50% increase in Suez’s annual subsistence payment which fell to be paid the following year.

Suez originally sought to challenge the CARs by way of judicial review in 2020, but permission was refused on the basis that Suez should first exhaust its alternative remedy, the Agency’s internal complaints procedure, which involved a supervisory review. The complaints procedure was followed, and both CARs were upheld. Suez commenced a second judicial review – the present claim.

Judgment

Issue 1: “Regulatory decision”

By sections 22(1) and (2) of the Legislative and Regulatory Reform Act 2006, regulators are subject to a statutory duty to “have regard to” the Code when determining the policies and principles by which they exercise their regulatory functions.

Fordham J noted that the preamble to the Code recognises this statutory duty for regulators to “have regard to” the Code when developing policies and operational procedures, but that it also includes the following important caveat: “if a regulator concludes, on the basis of the material evidence, that a specific provision of the Code is either not applicable or is outweighed by another relevant consideration, the regulator is not bound to follow that provision, but should record that decision and the reasons for it.”

Section 2.3 of the Code states that regulators should provide an impartial and clearly explained route to appeal against regulatory decisions. The Agency’s policies and procedures did not provide a merits appeal route against adverse CARs. The Agency’s internal guidance included the following as regards the question of what constitutes a “regulatory decision”:

“A regulatory decision imposes mandatory obligations on an operator such as issuing a regulatory notice or permitting decisions”.

The Agency’s guidance specifically stated that CARs were not regulatory decisions, on the basis that they were a means of compliance assessment monitoring – i.e. they do not impose a mandatory obligation.

The Court disagreed with the Agency’s interpretation of the term “regulatory decision”, finding that there was a material error of law in the Agency’s approach. There was no mention of a “mandatory obligation” prerequisite in the Code, nor any indication that it was intended.

The Court gave guidance on the various elements of a “regulatory decision”: there must be a decision as opposed to an action, advice, guidance, or a communication that a regulator is proposing to take a decision. The decision must be taken in the exercise of a regulatory function, and it must be adverse to the permit holder. Adverse decisions which impose mandatory obligations are a sub-species of “regulatory decision”, but they are not the only kind of regulatory decision. The legally correct interpretation of “regulatory decision”, the Court said, is straightforward:

“a decision, in the exercise of a regulatory function, which is adverse to a regulated person.”

The Court drew on various characteristics of the CAR, including that when preparing a CAR, Agency officers can decide that there has been serious non-compliance and identify action(s) required, and that CARs are publicly available and can negatively impact commercial reputation and affect contractual dealings. CARs form part of the “history of non-compliance” which the Agency considers when deciding whether to take enforcement action, and they can have financial implications for permit holders. The Court remarked that recipients of an adverse CAR can find themselves in an “invidious position” – whether to accept the conclusions in the CAR or “run the gauntlet” and defend enforcement action. Taking all of these characteristics into account, in the Court’s view, an adverse CAR was clearly a “regulatory decision”. And, in light of the contextual factors, the Court could see virtue in a merits appeal route that permit holders could access promptly.

The Agency had argued that it would be unrealistic and unworkable for every CAR to be appealable on its merits and pointed to the impact that a broader interpretation of “regulatory decision” could have on other regulators and regulatory functions subject to the Code. The Court acknowledged that regulators may have good reasons to identify a narrower category of appealable regulatory decisions. It noted that the section 22(2) statutory duty is limited to regulators having “regard to” the Code, and the commentary in the preamble to the Code (referred to above) provides for reasoned departure. Regulators are entitled, for identified and articulated reasons, not to provide an appeal route for a regulatory decision where doing so is outweighed by other relevant considerations. But this must be a conscious decision and it must be recorded, together with underlying reasons. The Agency had not done so in this case, because it had been proceeding on the basis of its erroneous understanding of what constituted a “regulatory decision”.

Issue 2: Procedural Fairness

The Court declined to hold, as had been argued by Suez, that common law procedural fairness required permit holders to be entitled to a merits appeal in the case of any CAR containing an adverse compliance score. The Court noted that the minimum standards of procedural fairness at common law are “famously context-specific“. There would be cases where adverse CARs are issued after a discussion with the permit holder, with the permit holder having an opportunity to make representations. There may be cases where an officer revisits a site with a view to revising a CAR. The Court did not consider that a generalised conclusion could be reached on this point.

The Court also declined to agree with Suez that procedural fairness required the decision-maker of a merits appeal to be independent of the Agency (as opposed to simply not having taken the original decision).

Issues 3 – 6 – Irrationality and the Tameside duty of sufficient inquiry

Suez raised various other arguments, including that the Agency’s decisions were vitiated by irrationality, and that they had failed to carry out an adequate investigation that complied with the Tameside duty of sufficient inquiry.

The Court declined to accept Suez’s submissions. On the facts, it was “impossible” to conclude that there had been insufficient enquiry, with the Court noting that, “the public law standard of legally adequate enquiry involves a built-in latitude for the decision-maker rather than a hard-edged substitutionary review“. The Court noted that the supervisory review was thorough and clear reasons for the decision were given. Suez had been given an opportunity to make representations and provide evidence, which it had done, and the decision took account of these representations. The Court could not accept that there had been irrationality or procedural unfairness.

Nonetheless, in the light of the Court’s decision on Issue 1 the Agency’s review decision was quashed and the Claimant’s challenge to the CARs was remitted to the Agency for reconsideration.

Comment

The judgment makes clear that, whilst the Code does not require regulators to provide a merits appeal route in each and every instance of a regulatory decision, where a regulator chooses to depart from the Code, it must make a conscious decision to do so and record it, together with reasons.

Regulators should consider their own internal processes in the light of this decision to consider whether they have taken appropriate steps in respect of all “regulatory decisions”.

Those subject to regulation should keep this analysis of what constitutes a regulatory decision in mind to ensure the regulatory procedures to which they are subject are fair and lawful.