Speciality Produce Ltd v Secretary of State for the Environment, Food and Rural Affairs

This case has involved a considerable number of twists and turns over its history. Indeed, the battle grounds for the application for judicial review have changed substantially since it was issued. However, as agreed at the outset of the proceedings, there is now but one issue between the parties in respect of whether or not the Claimant is entitled to relief. That issue was agreed as follows:

That application related to the status of the Claimant as a Producer Organisation (a “PO”) for the purposes of Council Regulation 2200/96, which is a regulation dealing with the common organisation of the market in fruit and vegetables.

For the purposes of this Judgment it is only necessary to set out the facts which are pertinent to the consideration of the issue of abuse. As I have outlined above, the issues between the Claimant and the Rural Payments Agency (“the RPA”) have, over the course of time, ranged over a large number of issues. This judgment is only addressing the identified issue remaining in these proceedings.

The Claimant is an Industrial and Provident Society which was originally set up in 1998, in response to demand from growers of, in the first instance, salad produce. Originally, it comprised seven members but, over the course of time, the number of subscribing growers has increased. In 1998 the Claimant was granted recognition as a PO. An advantage of being a PO is that, under the terms of Regulation 2200/96, a PO is entitled to benefit from a system of match-funding in relation to monies expended on marketing its growers’ produce. Initially, this approval was granted on the basis of a five-year plan commencing on 1 January 1999. The scheme concerning POs is administered by the RPA.

From 1999 to 2003 the Claimant was regularly and repeatedly audited, and during that period retained its status as a PO and received the funding which was associated with that status. During that period of time its operations included a central marketing function. That central marketing function dealt in particular with the buyers from major food retailers, who sourced produce for their food stores from the Claimant. Documentation has been produced which I do not need to set out which provides evidence of this centralised marketing activity with the buyers of the main food retailers.

By 2004 it had become clear that the market in relation to the goods that the Claimant was providing was changing. Major food retailers were moving towards a system of operating with category managers which it is important to describe in order to obtain an understanding of the issue which has underlain the dispute between the Claimant and the Defendant.

The rationalisation of the market is a process which has perhaps been most clearly described in the Claimant’s business plan prepared for the period 2003–2008. That document was prepared and submitted as part of their application for renewal of recognition as a PO at the end of the first five years of their recognition. What that business plan demonstrates is that in the late 1990s the bringing of fruit and vegetable produce to the market, which consisted principally of large food store chains, was undertaken through a complex supply web involving both wholesalers and the provision of produce to the retailers by growers direct. This complex web subsequently rationalised by 2000 to a far more limited number of co-ordinated suppliers providing fruit and vegetable produce to the retailers. Subsequently, in or around 2004, this rationalisation progressed further by the introduction of category managers. Category managers take over the procurement of an entire category of produce for the retailer, thereby further rationalising the channelling of goods through the market to the consumer.

The Claimant had foreseen these changes in their market, and had changes planned in order to address these issues. Returning to their business plan, albeit the draft from which I propose to quote is from December 2005, I was assured that the essence of the plan was the same as that which was submitted to the RPA in 2003. The Claimant’s approach is set out in the section of the business plan which deals with Marketing Agents, as follows:

The application for renewal of recognition supported by the 2003 business plan containing, in essence, the text which I have quoted was approved by the Minister through the RPA on 8 December 2003. In the letter communicating that decision the RPA confirmed that the organisational strategy being pursued by the Claimant met with the requirements of the regulations in relation to POs. In March 2005 the central sales function of the Claimant was closed. As explained in the business plan the marketing activities were divided up amongst the members, particular members having been nominated to lead the marketing in respect of particular categories of produce.

In 2005–6 the European Court of Auditors audited the operation of the PO scheme in the UK. This gave rise to a number of issues about which action was required. The Claimant was approached and its activities re-evaluated in the light of this auditing exercise in July 2006. As a result of that re-evaluation, they were de-recognised. The notes of the re-evaluation exercise provide a distillation of the conclusions of the panel who conducted that re-evaluation, as follows:

The setting up of separate functions for categories of product was of course the exercise which was described in the business plan as being necessary to meet the challenge of the introduction of category managers. The status of the Claimant was withdrawn on 17 August 2006.

This decision was followed by a meeting between the Claimant and the RPA on 30 August 2006, leading to an exchange of emails which has a bearing on the question of central marketing. The emails were exchanged between Mr Woods, the commercial manager of the Claimant, and Mr Lockwood, who was employed within the RPA inspectorate as a specialist in their policy and advice unit. Both had been present at the meeting on 30 August 2006. On 11 September 2006 Mr Woods emailed Mr Lockwood to confirm as follows:

The context of this was setting out a number of aspects of changes to the operational structure of the Claimant in order to meet what was perceived to be the requirements to secure recognition as a PO. In response to this email, Mr Lockwood replied on 12 September 2006 as follows:

Following this exchange of emails, on 15 September 2006 the Claimant applied for re-recognition as a PO. That application was, however, refused on 14 December 2006. In the letter communicating that decision dated 14 December 2006, the RPA stated as follows in relation to part of the reasons why the application had been unsuccessful:

The Claimant then embarked upon an appeal procedure in respect of both the initial decision to de-recognise them and also the refusal to re-recognise them. That appeal process is undertaken in two stages. The stage one appeal was dismissed. This was a process conducted on paper and, in relation to sales, the decision records as follows:

The matter then proceeded to the stage two appeal, involving a hearing before a panel of experts. The panel recommended to the Minister, following the hearing, that the appeal should be allowed. However, after further exchanges of correspondence between the Minister and the Claimant’s solicitors, the application was refused, partly at least on the basis that there was inadequate documentation to support the findings of the panel and the contentions of the Claimant. The application was refused on 18 July 2008. That decision initially founded this claim for judicial review. Whilst the claim was on foot, the Claimant sought to address the substance of the Minister’s refusal by the provision of further documentation. The decision was reconsidered by the Defendant in the light of that material, but the reconsideration led to a refusal by email dated 19 March 2009.

Whilst it is not clear from the terms of that decision, it was confirmed on behalf of the Defendant that the essence of the decision was the issue for determination in this case which I outlined at the start of this judgment, namely whether or not the Claimant’s position gave rise to an abuse in European Community law. The basis of those contentions is the evidence provided in relation to the documentation by Mr Woods in a witness statement exhibiting that information dated 19 January 2009. Within that witness statement the following paragraphs are particularly germane to the issues before me and are those which are the foundation of the Defendant’s contention that the re-establishment of the central marketing function by the Claimant is an abuse leading to the necessity to withhold status as a PO when measured against the legal principles which I shall set out below.

It is against the background of these facts that the Defendant contends that the Claimant’s application containing as part and parcel of it the re-establishment of the central sales function is an abuse in terms of the established principles of European law. In the recent case of Milk Supplies Limited v Department for Environment, Food and Rural Affairs [2009] EWHC 503, Plender J observed that the European law concept of “abuse of rights” is troublesome to a common lawyer since common lawyers are apt to define a right as being a legal entitlement requiring another person to perform the correlative duty. I understand and would with respect agree. However, to a practical person, the introduction of the concept of abuse of rights is a sensible and pragmatic response to the problem of unintended consequences, so as to avoid the creation and satisfaction of perverse incentives. It provides a safety valve recognising that the creation and application of rules do not always inevitably lead to the outcome which was desired and is desirable.

The starting point for the consideration of the legal principles relevant to this case must be the regulations which lead to the establishment of producer organisations. Council Regulation 2200/96 provides in its recitals an insight into the reasons why the regulations were enacted. In particular, those recitals provide as follows:

Having observed that Article 1 of the Regulation is to set up a common organisation of the market in fruit and vegetables, in Article 11 criteria are provided for the recognition of producer organisations as follows:

Article 11 goes on to require at Article 11.1(3) that producer organisations should market their entire production through the producer organisation. Then, Article 11.2 provides as follows:

I heard various submissions about what, reading the Regulations as a whole, the purpose of the Regulations was. There is an obvious danger in paraphrasing what is an extensive piece of legislation. However, it is clear to me that in essence the purpose of the Regulations is to establish and promote as a recognised and beneficial market organisation the PO, provided that in so doing the administration of the scheme and the distribution of funding to facilitate PO’s would not give rise to either distortion of the market or the inefficient use of Community funds. I shall deal with the purpose of the Regulation in relation to the facts of this case below. The importance of obtaining an understanding of the purpose of the Regulations is the role that plays in the consideration of whether or not, on the facts of this case, the Claimant’s application amounts to an abuse.

The principle of abuse is initially to be found within Council Regulation 2988/95 at Article 4.3, which provides as follows:

As that Article has been explained and understood in subsequent case law in essence, whilst it has to be read as a whole, it gives rise to two questions. Firstly whether, viewed objectively, the principal aim of an act was undertaken for the purpose of obtaining an advantage contrary to the purpose of the Regulations notwithstanding that it falls strictly within the parameters of the Regulations. Secondly, taking a subjective view, whether the act was one which sought to create the conditions for securing the advantage artificially or for no commercial purpose? The cases which found this formulation of the law are as follows:

Firstly, in case C-110/99Emsland Stärke v Hauptzollamt Hamburg-Jonas [2006] ECR I-1609, the Court of Justice set out the principles in their judgment at paragraphs 52 and 53:

Following that case, the question of abuse was further considered by the Court in case C-255/02Halifax plc v Commissioners of Customs and Excise. In that case, the Court of Justice summarised the position again as follows:

Following the decision of Halifax, in the case of C-425/06 Ministero Dell’EconomiaE delle Finanze, the Part Service Sr [2008] ECR I-897l, the Court provided clarification of the first of the two limbs of the question posed in Emsland Stärke. It clarified in paragraphs 44 and 45 that, in relation to that first and objective question, the obtaining of the advantage must constitute the principal aim of the act in question.

As set out above, these principles were recently considered by this court in the case of Milk Supplies Limited v Department for Environment, Food and Rural Affairs[2009] EWHC 503 (QB) where, having set out the text of Council Regulation 2988/95, Plender J observed as follows:

The final aspect of these principles which was debated in the course of argument was the situation presented when a business had a number of means of organising itself. It is clear to me from the decision of the Court of Justice in case C-108/99Commissioners of Customs and Excise v Cantor Fitzgerald International [2001] ECR I-7257 that the existence of more than one business or transaction structure for a person to pursue does not justify the selection of a form of transaction which would amount to an abuse. In other words, it is obviously open to a person to choose as to how they propose to organise their business or transactions but it is not available to them to select a form which would amount to an abuse. They can choose between different structures or arrangements, but the existence of choice does not justify the selection of an action which amounts to an abuse.

I turn now to pose the questions raised by the legal principles in relation to the facts of this case.

As I have set out above, I am satisfied that the purpose of the Regulations is to encourage and fund the establishment of POs as an appropriate market structure to facilitate the operation of the market provided that this does not lead to Community funds being wasted or the market being distorted. The Defendant says that the provision of unnecessary services in the form of the central sales function, which had been reinstated principally to achieve a subsidy, would not achieve the purpose of the Regulations. In particular, it would involve the wasting of Community funds by their being provided to assist the provision of a service which is not necessary.

It is clear and obvious that the obtaining of the match-funding by way of subsidy is an advantage which engages the consideration of the question of abuse. Furthermore it was not contended that the re-establishment of the central marketing function was not strictly within the ambit of the Regulations on the evidence now available.

The first limb of the test raises an objective question. Viewed objectively, I can see no basis for concluding that the reinstatement of a central marketing function does not fulfil the purpose of actively marketing and promoting all of the produce produced by the members of the proposed PO. It is a form of organisation which would facilitate the marketing of all of the growers’ produce and I can see nothing which would suggest that objectively viewed it is a form of organisation which is either wasteful or unnecessary. Tellingly it is clear to me that this central marketing function has been repeatedly regarded by the RPA, who undoubtedly seek to approach these issues as objectively as possible, as being an appropriate form of organisation to meet the requirements of the Regulations: I refer to the email from Mr Lockwood and the conclusions of the Stage 1 Appeal. This approach was more likely than not based upon the findings and advice from the investigations of the European Court of Auditors.

Mr Hutton’s submissions in this regard depend upon his reliance on parts of what Mr Woods describes as the reasons for the reorganisation of the Claimant to remove the central marketing function. These are subjective opinions and as stated the answer to the first question depends on an objective view of the matter. However, leaving aside the fact that these are subjective opinions and of course that Mr Woods states later in the witness statement that in current market conditions there would be commercial benefit in re-establishing the central sales function, it is clear that Mr Woods’ view is not the only view of the matter. In fact, as set out above, it appears clear to me that the view of Mr Lockwood and the others who participated in the determination of the Claimant’s stage one appeal was that a central marketing function was an essential prerequisite of securing the purpose of the Regulations. Leaving this difference of opinion which clearly existed several years ago to one side, to my mind it is clear that viewed objectively the establishment of a central marketing function for all of the goods produced by the members of the Claimant could not properly be said to be contrary to the purpose of the Regulations: indeed, it can be perceived as being provided directly in order to further the purposes of the Regulations.

My conclusions in respect of the first limb of the question in relation to abuse will be sufficient to dispose of the Defendant’s case. I propose, however, also to analyse the second limb.

Whilst, again, the Defendant relies on certain passages from Mr Woods’ witness statement, the case on this second limb is clear-cut. It is plain on the evidence that, viewed from the perspective of the Claimant and indeed from the perspective of the advisers of the Defendant, there are clear commercial purposes lying behind the re-establishment of the central marketing function. As Mr Woods makes plain in his witness statement at paragraph 67, he sees good commercial sense in re-establishing that central marketing function. Moreover, it is clear to me that Mr Lockwood’s views in advising the Claimant in September 2006 were to similar effect. Although Mr Hutton in his submissions sought to rely upon the expert report provided by Professor Hughes in relation to the evolution of the market, as Mr Robertson rightly points out towards the end of that report there is evidence demonstrating that the use of category managers has not proved altogether successful, and that new marketing arrangements need to be evolved and established to secure the future of the Claimant’s business. I accept the submission that this evidence clearly demonstrates the potential value of the reinstatement of the central marketing function. Thus, in relation to this second limb also, the Claimant’s case is successful. It cannot in my view be properly contended that the re-establishment of the central marketing function would serve no commercial purpose.

In the circumstances of my findings, there can be no dispute but that the decisions taken by the Defendant on 18 July 2008 and 19 March 2009 must be quashed. Mr Robertson goes further, and submits that there should be an injunction granted requiring the Defendant to recognise the Claimant as a PO with effect from 1 January 2007. This is put on the basis that it was agreed by the Defendant before me that the only matter lying between the Claimant and recognition as a PO was the argument in respect of abuse, which I have disposed of. In those circumstances it is submitted, the Court could be satisfied that there could be no impediment to the recognition of the Claimant, and could properly award the injunction.

I am unwilling to take that additional step for the following reasons. Firstly, this Court will always be reluctant to put itself in the shoes of the decision-maker. In doing so, it exceeds its supervisory public law role, which is necessarily limited to examining whether there are errors of law in relation to decisions which have been reached rather than providing a forum in which decisions can be re-made. I suspect it may be for this reason that Mr Robertson was unable to locate any authority to act as a direct precedent founding his suggestion. Secondly, I am not convinced that such a remedy is required in this case since, once in receipt of my judgment, the Defendant will be able rapidly to determine the appeal in the light of my conclusions, and no doubt bearing in mind that, as set out above, the only factor which precluded the resolution of this claim by the granting of status to the Claimant was the contention raised in relation to abuse. All other factors which had been of concern to the Defendant had been resolved to the Defendant’s satisfaction by the time this matter was called on. Thus, to my mind, it would be unnecessary, let alone heavy-handed, for this Court to impose a decision where there is no evidence of the Defendant being reluctant to deal with the application speedily and appropriately once these proceedings had been resolved.

For the reasons given, I am not satisfied that the Claimant’s application for re-recognition and appeal in respect of the initial refusal falls foul of the European law principles of abuse, and for that reason the Defendant’s decisions must be quashed.