The availability of judicial review against bodies exercising “public functions”

4 October 2016

In an era where the state provides public services through the private and voluntary sectors, this matter has become increasingly important for the individual in seeking to vindicate his or her rights against the exercise of public power.

In general terms, judicial review is the principal means by which the courts scrutinise the actions of public bodies. Judicial review is provided by statute (under sections 29 and 31 of the Senior Courts Act 1981), but the courts have long enjoyed an inherent jurisdiction to supervise public bodies to ensure that they act lawfully and fairly.

The availability of judicial review against public bodies is an important constitutional safeguard. Judicial review provides a corrective against the unlawful use of public law powers by public bodies, therefore protecting the citizen by making sure that public bodies are subject to the rule of law.

The availability of judicial review

“Source of power” test

Judicial review claims are most commonly lodged against decisions (or non-decisions) by public office holders or public bodies who source their powers from statute, the royal prerogative or, in certain cases, the common law. In such cases, judicial review is available because the “source of power” test is satisfied. This test provides that judicial review will only be available where the decision (or non-decision) by the public body relates to that body’s statutory powers or powers under the prerogative or common law and, in order for the challenge to be entertained, it must relate to the exercise (or non-exercise) of those powers further to the body’s public law duties to the claimant.

As noted above, much of the delivery of public services is now contracted out by government to private sector businesses and the so-called “third sector” (for example charities). Furthermore, we have seen that over time many bodies, which are in origin “private sector” in nature, have assumed responsibilities for the provision of goods and services to the general public. For instance, many Church of England schools, which are today subject to statute based law, were founded as voluntary, private religious institutions. Such bodies would potentially be beyond the scope of judicial review if we only applied the source of power test. Over the past few decades, the courts have reacted to the changes in the structure of the state to bring these bodies within the ambit of the supervisory jurisdiction.

 

R v Panel on Take-Overs and Mergers, ex parte Datafin [1987] QB 815 

The landmark case of R v Panel on Take-Overs and Mergers, ex parte Datafin [1987] QB 815 established that the source of power test is not the only test for determining whether the decisions or non-decisions of a body are amenable to judicial review. The Court of Appeal in Datafin held that bodies performing public duties or exercising powers that were public in nature may be subject to judicial review even though the powers being challenged stemmed from a non-statutory or non-prerogative source. In Datafin, Lloyd LJ said:

“… I do not agree that the source of the power is the sole test whether a body is subject to judicial review… Of course the source of the power will often, perhaps usually, be decisive. If the source of power is a statute, or subordinate legislation under a statute, then clearly the body in question will be subject to judicial review. If, at the other end of the scale, the source of power is contractual, as in the case of private arbitration, then clearly the arbitrator is not subject to judicial review…

But in between these extremes there is an area in which it is helpful to look not just at the source of the power but at the nature of the power. If the body in question is exercising public law functions, or if the exercise of its functions have public law consequences, then that may … be sufficient to bring the body within the reach of judicial review … The essential distinction is between a domestic or private Tribunal on the one hand and a body of persons who are under some public duty on the other."

The Datafin case concerned a body then known as the Panel on Take-overs and Mergers (today known as the “Takeover Panel”). This body did not enjoy any statutory, prerogative or common law powers. Indeed, it had no contractual relationships with the bodies it regulated. However, it was in practice an essential part of the regulation of the City of London’s financial services market as it supervised takeovers in the City. The Court of Appeal thus held that the Panel was amenable to judicial review in relation to its powers over those it regulated.

 

“Public functions” test

Datafin gave rise to what is now termed the “public functions” test. The effect of this test is that all bodies exercising functions of a public law nature are, in principle, susceptible to challenge by judicial review. What matters under the test is the nature of the decision or non-decision in question rather than, per se, the identity of the body under challenge.

The consequence of this test is that apparently non-state private bodies (for example, the managers of a privately-owned psychiatric hospital) have found their decisions subject to judicial review.

In R (Beer) v Hampshire Farmers Markets Ltd [2004] 1 WLR 233, Dyson LJ (as he then was) summarised the development of this area of law following Datafin:

“... the law has now been developed to the point where, unless the source of power clearly provides the answer, the question whether the decision of a body is amenable to judicial review requires a careful consideration of the nature of the power and function that has been exercised to see whether the decision has a sufficient public element, flavour or character to bring it within the purview of public law. It may be said with some justification that this criterion for amenability is very broad, not to say question-begging. But it provides the framework for the investigation that has to be conducted …”

In conducting the “investigation”, the courts will look to a number of factors including, amongst other things, the public importance of the function being examined.

Why this matters to individuals and organisations
In Datafin, Sir John Donaldson M.R. said it is important for the courts to “recognise the realities of executive power” and not allow “their vision to be clouded by the subtlety and sometimes complexity of the way in which it can be exerted”. Private sector bodies acting in a public law context (for example voluntary regulators of professions) must understand that their acts may fall under the scope of the courts’ supervisory jurisdiction. Indeed, there have been attempts lately to extend the parameters of review further to decisions made in what might otherwise appear to be a commercial environment.

 

R (Holmcroft Properties Ltd) v KPMG [2016] EWHC 323 (Admin)

Earlier this year, the High Court dismissed an application for judicial review against the role played by KPMG as a “skilled person” under section 166 of the Financial Services and Markets Act 2000.

The facts of the case relate to the mis-selling of various interest rate hedging products (IRHPs) by Barclays Bank plc. The Financial Services Authority (the FSA) (the predecessor organisation to the Financial Conduct Authority) agreed with Barclays that the bank would set up a scheme to provide redress to customers who had been wrongly sold IRHPs. Barclays agreed further with the FSA that KPMG should oversee the implementation and application of the scheme. Under the scheme, Barclays would not make any offers of compensation to customers except with KPMG’s approval.

The claimant (Holmcroft Properties Ltd) argued that it was made an offer by Barclays that was inadequate and that KPMG had acted unfairly by confirming the offer made by Barclays. The claimant submitted that KPMG’s role as independent reviewer had a sufficient “public flavour” (as described by Dyson LJ in Hampshire Farmer Markets (see above)) to give rise to public law duties.

In giving judgment, the court accepted that “KPMG was clearly "woven into" the regulatory function” and that it's “function in approving the terms of any offers was critical in achieving the twin aims of objectivity and acceptability” (at para. 39). Nevertheless, the court dismissed the claim by holding that KPMG’s duties did not have sufficient “public law flavour” to render it susceptible to judicial review and that there was “no direct public law element in KPMG’s role” (at para. 47) because, amongst other things, KPMG’s powers were conferred by contract and that the FSA had no regulatory obligation to carry out the role which KPMG played.

 

Conclusion

Although the claimant’s case in Holmcroft was dismissed, it serves as a reminder that the boundaries of public law are not fixed. Holmcroft was particularly interesting as, at the permission stage of bringing the claim, the court held that there was at least an arguable case that KPMG was amenable to judicial review.

English law recognises that a body can act in more than one capacity and consequently not all the activities of private bodies are subject only to private law. A body operating on the amorphous boundary between private and public law should have regard to this and conduct its legal affairs accordingly, by reference to administrative and public law principles.

 

Further information

Our team are regularly blogging about a range of legal issues, including public law matters and the impact of Brexit. Follow our Public Law blog, Judicial Review blog and Brexit blog  for the latest commentary.

Should you have any questions about the issues covered in this blog, please contact Adam Chapman or a member of our Public Law team.



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