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The Second Opinion: U.K Supreme Court Rules Against Sanctions on Iranian Bank

A Commentary on Recent Legal Developments by the Opinions Group of McCarthy Tétrault LLP

Posted in The Second Opinion
Kirsten Thompson

The U.K. Supreme Court recently quashed an order prohibiting Bank Mellat from operating in Britain  (the “Order”) over allegations the Bank helped finance Iran’s nuclear weapons program. The decision will have ramifications for states attempting to impose sanctions, including Canada, as well as institutions attempting to implement such sanctions.

The Court also weighed in on the appropriateness of secret hearings held to determine evidentiary issues in such matters.

In 2009, the British government prohibited any company operating in the U.K. from dealing with the Tehran-based Bank as part of rules designed to prevent the development of nuclear weapons in Iran. The Order was made under the authority of the U.K. Counter-Terrorism Act 2008 which empowers the Treasury to make such orders in circumstances where there is a risk of (a) money laundering; (b) terrorist financing; and (c) nuclear proliferation. Bank Mellat applied to have the Order set aside.

The Treasury took the view that some of the evidence relied on by the Treasury to justify the Order was of such sensitivity that it could not be shown to the Bank or its representatives and requested that the Supreme Court to go into a secret session. These secret sessions were created by the Justice and Security Act 2013, and created an extraordinary alternative to public interest immunity procedure. This alternative, known as Closed Material Procedure or “CMP”, allows courts, even those hearing an ordinary civil case, to consider any material the disclosure of which would be “damaging to the interests of national security” without such material being disclosed to the non-governmental party to the case.

The Government’s reason for the legislation was said to be to increase judicial scrutiny of the actions of the Intelligence Services because the legislation would allow courts to consider material that would otherwise be excluded by the operation of public interest immunity. However, the prospect of secret hearings to determine ordinary civil cases provoked very strong objections from those who argued that such a regime is flatly contrary to the rule of law and natural justice.

In March, 2013, the Supreme Court heard the case, holding a closed hearing for the first time in its history, an event that Lord Neuberger described as an “unhappy procedure”.  The Bank was represented by a special advocate but the Bank itself could not see the material or attend the closed hearing.

Before the Supreme Court, the Bank’s appeal was divided into two issues. The first issue concerned the use of a CMP in the Supreme Court. (Bank Mellat v Her Majesty’s Treasury (No. 1) [2013] UKSC 38 (“Bank Mellat #1)”) The second issue concerned the Bank’s appeal against the lower court’s decision to uphold the Order, and challenged the Order on both procedural and substantive grounds (Bank Mellat v Her Majesty’s Treasury (No. 2) [2013] UKSC 39 (“Bank Mellat #2)”).

In Bank Mellat #1, a divided Court held that it is possible for the Supreme Court to adopt a CMP on an appeal and that it was appropriate to adopt a CMP in this appeal. However, Lord Neuberger said that having held the closed hearing, the Court had concluded that there had been “no point in the Supreme Court seeing the closed judgment [which related to the secret intelligence], because there was nothing in it which could have affected [our] reasoning in relation to the substantive appeal.” Commenting more broadly on the process, he cautioned:

A [closed hearing] should be resorted to only where it has been convincingly demonstrated to be genuinely necessary in the interests of justice. If the court strongly suspects that nothing in the closed material is likely to affect the outcome of the appeal, it should not order a closed hearing.

Appellate courts should be robust about acceding to applications to go into closed session or even to look at closed material.

In Bank Mellat #2, an equally divided Court allowed the Bank’s appeal and set aside the direction and quashed the Order. Writing for the majority, Lord Sumption found that the rules of procedural fairness had been breached because the Bank was not given an opportunity to make representations in respect of the Order before it was made. On the substantive issue, Lord Sumption found that the Order itself was disproportionate, irrational, and discriminatory and in any event was vitiated by irrelevant considerations or mistakes of fact.

The Bank is entitled to succeed [in its appeal] on the ground that it received no notice of the Treasury’s intention to make the direction, and therefore had no opportunity to make representations.

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.

These judgments will be important as there are over 50 similar cases in which persons (both human and corporate) are appealing economic sanctions decisions in the European Union. This decision will likely cause states to review the way in which decisions to impose sanctions are made, particularly in light of the financial exposure for states in respect of sanctions decisions that are later found to be unwarranted. Canada has imposed similar sanctions, both UN-mandated and non-UN mandated, on assets and persons with ties to Iran and many institutions have struggled to implement them.