| FIRST DIVISION, INNER HOUSE, COURT OF SESSION |
Lord President Lord Eassie Lord Malcolm | [2012] CSIH 92 XA77/12 OPINION OF THE LORD PRESIDENT in the Special Case by THE SCOTTISH MINISTERS Appellants; against ANGUS GROWERS LIMITED Respondent: _______________ |
For the appellants: J Wolffe QC, Cameron; Solicitor to the Scottish Ministers
For the respondent: Mure QC, Watson; Drummond Miller LLP
7 December 2012
I INTRODUCTION
[1] This is a Special Case stated by the Scottish Land Court. It arises from a decision of the Rural Payments Agency (RPA) to withdraw recognition of Angus Growers Limited (AG) as a producer organisation of fruit and vegetables. AG appealed to the Land Court against the decision. By Order dated 14 February 2012 the Land Court set the decision aside. The Scottish Ministers have requisitioned the Special Case on two points of law.
[2] The essence of the dispute concerns the extent to which AG exercised control over Angus Soft Fruits Limited (ASF) to which it outsourced its marketing.
II THE EUROPEAN BACKGROUND
Producer organisations and EU financial assistance
[3] Organisations of producers of fruit and vegetables are entitled to financial assistance from the European Union. The money is disbursed by the RPA, a department of the United Kingdom Government, on behalf of the United Kingdom Government and the devolved administrations.
The European legislation
[4] The Land Court proceeded on the basis that the matter was governed by Council Regulation (EC) No 1182/2007 (the Council Regulation) and Commission Regulation (EC) No 1580/2007 (the Commission Regulation). The Council Regulation had been replaced by Council Regulation (EC) No. 1234/2007 with effect from 1 July 2008, but nothing turns on that (Note, para [2]).
The Council Regulation
[5] The Council Regulation provides inter alia as follows:
"TITLE III
PRODUCER ORGANISATIONS
CHAPTER I
Requirements and recognition
Article 3
Requirements
1. For the purposes of this Regulation, a producer organisation shall be any legal entity or clearly defined part of a legal entity which complies with the following requirements:
...
(c) it has one or more of the following objectives:
(i) ensuring that production is planned and adjusted to demand, particularly in terms of quality and quantity;
(ii) concentration of supply and the placing on the market of the products produced by its members;
(iii) optimising production costs and stabilising producer prices;
...
2. The articles of association of a producer organisation shall require its producer members, in particular, to:
...
(c) market their entire production concerned through the producer organisation;
...
4. The articles of association of a producer organisation shall also provide for:
...
(c) rules enabling the producer members to scrutinise democratically their organisation and its decisions;
... "
Article 4
Recognition
1. Member States shall recognise producer organisations within the meaning of Article 3(1) applying for such recognition, provided that ...
(c) there is sufficient evidence that they can carry out their activities properly over time and in terms of effectiveness and concentration of supply ...
(e) they effectively provide their members, where necessary, with the technical means for collecting, storing, packaging and marketing their produce ...
Article 6
Outsourcing
Member States may permit a recognised producer organisation ... to outsource any of its activities, including to subsidiaries, provided that it provides sufficient evidence to the Member State that doing so is an appropriate way to achieve the objectives of the producer organisation or association of producer organisations concerned."
The Commission Regulation
[6] The Commission Regulation provides inter alia as follows:
"TITLE III
PRODUCER ORGANISATIONS
CHAPTER I
Requirements and recognition
Section 2
Requirements applicable to producer organisations ...
Article 25
Structures and activities of producer organisations
Member States shall ensure that producer organisations have at their disposal the staff, infrastructure and equipment necessary to fulfil the requirements laid down in Article 3(1) of ... [the Council Regulation] and ensure their essential functioning, in particular as regards:
(a) the knowledge of their members' production;
(b) collecting, sorting, storing and packaging the production of their members;
(c) commercial and budgetary management; and
(d) centralised bookkeeping and a system of invoicing ...
Article 27
Provision of technical means
For the purposes of Article 4(1)(e) of ... [the Council Regulation], a producer organisation which is recognised for a product for which the provision of technical means is necessary shall be considered to fulfil its obligation where it provides an adequate level of technical means itself or through its members, or through subsidiaries, or by outsourcing ...
Article 29
Outsourcing
Outsourcing of an activity of a producer organisation shall mean that the producer organisation enters into a commercial arrangement with another entity, including one of its members or a subsidiary, for the provision of the activity concerned. The producer organisation shall nevertheless remain responsible for ensuring the carrying out of that activity, and overall
management control and supervision of commercial arrangement for the provision of the activity ...
CHAPTER V
General Provisions
Section 3
Sanctions ...
Article 116
Non-respect of recognition criteria
1 Member States shall withdraw the recognition of a producer organisation if a failure to respect the criteria for recognition is substantial and results from the fact that the producer organisation acted deliberately or by serious negligence.
Member States shall in particular withdraw the recognition of a producer organisation if a failure to respect the criteria for recognition concerns:
(a) a breach of the requirements of Articles 23, 25, 28(1) and (2) or 33;
The withdrawal of recognition under this paragraph shall take effect from the date from which the conditions for recognition were not fulfilled ...
2 Where paragraph 1 does not apply, Member States shall suspend the recognition of a producer organisation if a failure to respect the criteria for recognition is substantial but is only temporary.
During the period of suspension, no aid shall be paid. The suspension shall take effect from the day where the check has taken place and shall end on the day of the check which shows that the criteria concerned have been fulfilled.
The period of suspension shall not exceed 12 months. If the criteria concerned are subsequently not fulfilled after 12 months, recognition shall be withdrawn ...
3 In other cases of a failure to respect the criteria for recognition, where paragraphs 1 and 2 do not apply, Member States shall send a warning letter stating the corrective measures to be taken. Member States may delay payments of aid until the corrective measures are taken.
A failure to take the corrective measures within a 12 month period shall be regarded as substantial failure to respect the criteria and paragraph 2 shall subsequently be applied."
European jurisprudence
France v Commission ([2009] ECHR II - 188)
[7] In this case the Court of First Instance of the European Union considered Council Regulation (EC) No 2200/1996, the predecessor of the Council Regulation of 2007. The court was concerned with the provisions in the 1996 Council Regulation that were equivalent to articles 3(1)(c)(ii), 3(2)(c) and 4(1)(e) of the 2007 Council Regulation.
[8] France sought annulment of a decision by the European Commission to refuse to reimburse a sum disbursed by the French Government to certain producer organisations. The Commission decided that the relevant producer organisations did not effectively provide facilities to members.
[9] France submitted that the requirement was fulfilled when members could rely on their own facilities to meet their storage, packaging and marketing needs. The Court concluded that producer organisations were not required to own the facilities that they provided to members. They could be hired from a third party (para [35]). The requirement of the Regulation was fulfilled where provision of facilities to members was guaranteed as and when the need arose (para [36]). Members were not obliged to use those means. It was enough that they were available to them (para [41]). The purpose of the requirement was to achieve economies of scale (paras [37], [40]). Therefore the possession of adequate facilities by individual members did not, by itself, fulfil the requirement (para [38]).
[10] The Commission also decided that the produce was not placed on the market by the producer organisations. Placing on the market presupposed that those organisations controlled the conditions of sale. In fact, the setting of prices was left to members. France submitted that the producer organisations' involvement in marketing the produce, rather than in setting the conditions of sale, was sufficient. In any event, the placing of products on the market could be delegated to members. The relevant Regulation (Commission Regulation (EC) No 1432/2003, art 6(2)) contemplated that the producer organisation might "entrust to third parties" certain tasks. France also relied on article 29 of the new Commission Regulation of 2007 regarding outsourcing (supra).
[11] In the Court's view:
"The producing organisation is entrusted with controlling the conditions of sale and in particular with setting the selling price of production. In fact, the promotion of concentration of supply ... is possible only if a significant part of the members' production is sold through the producer organisation" (para [54]).
The Court distinguished the position of third parties from that of members, as follows:
" ... it should be made clear that the possibility of entrusting a task to a third party is a particular way of carrying out the obligation in question and does not have the effect of discharging the person responsible from his obligation" (para [59]).
It was unnecessary for the Court to comment on article 29 of the Commission Regulation which was not in force at the relevant time (para [59]). The Court concluded that, as the sale of the produce was controlled individually by members rather than centrally by the producer organisation, the organisation had not placed the produce on the market.
R (International Association of Independent Tanker Owners) v Secretary of State for Transport ([2008] 3 CMLR 9) (Intertanko)
[12] In this case a Grand Chamber of the Court of Justice considered whether a Directive that imposed penalties for marine pollution caused by "serious negligence" was void for vagueness. The Grand Chamber held that the term was sufficiently certain. Its meaning should be derived from its use in the legal systems of Member States (paras [74]-[76]). It described the concept in the following way:
"'serious negligence' ... must be understood as entailing an unintentional act or omission by which the person responsible commits a patent breach of the duty of care which he should have and could have complied with in view of his attributes, knowledge, abilities and individual situation" (para [77]).
Nothing was said to suggest that this interpretation was peculiar to the context of marine pollution or was influenced by the other terms of the relevant Directive. In my opinion, we may properly rely on this decision in interpreting "serious negligence" in article 116 of the Commission Regulation.
[13] It is unfortunate that this case was not brought to the notice of the Land Court. It was referred to for the first time in AG's note of argument in this appeal.
III THE HISTORY OF ANGUS SOFT FRUITS LIMITED AND ANGUS GROWERS LIMITED
Angus Soft Fruits (ASF)
[14] Lochart Porter, W H Porter and James Gray were each concerned in the production of soft fruit. In 1994 they set up a business to market their produce and that of other farmers. In 1998 the business was incorporated as Angus Soft Fruits Limited (ASF). Lochart Porter owns 60% of ASF, is a director of it and effectively controls it. ASF engages in research and development, including the development of a premium brand of strawberry and of new systems of production.
Angus Growers (AG)
[15] AG was incorporated in 2002 and was recognised as a producer organisation. When first established it had 14 members, including the three shareholders of ASF. Lochart Porter contributed 19% of AG's turnover. The ASF shareholders combined contributed 42%. By 2009, AG had 20 members. By then Lochart Porter contributed 15% of turnover, and the ASF shareholders combined contributed 38%.
[16] The articles of association provided that, subject to any special resolution, the company was to be managed by its directors who could exercise all powers of the company. Decisions were by majority, the chairman having a casting vote.
[17] Until September 2009 the directors of AG were Lochart Porter (chairman), James Gray and two others. Accordingly, two shareholders of ASF could effectively control the board of AG. In September 2009 this ceased to be the case when Lochart Porter resigned from the chairmanship and James Gray resigned from the board.
The agency agreement
[18] AG and ASF entered an Agreement with the following material terms, with a correction to clause 14.1.2 to reflect the parties' intentions (cf Land Court's Note, para [20]):
"2.2 For the duration of this Agreement and subject to its terms, the Agent [sc ASF] shall be the sole agent in charge of the administration of the Company [sc AG] and its agent for the sale of Produce. For the avoidance of doubt the Produce will remain in the ownership of the relevant Member until sold by the Agent to the buyer ...
3 Administration
3.1 [ASF] shall provide [AG] with a full administration service including:
3.1.1 administering the activities of [AG] in accordance with the articles of association of [AG], the Grower's Agreements [between Members and AG] and any directions of the Board;
3.1.2 provision of proper management and financial controls and the supply of information to the Board relevant to [AG] and the operation of the Grower's Agreements;
3.1.3 provision of full and accurate record keeping in relation to all financial and other transactions.
4 Marketing
4.1 [ASF] shall provide [AG] with a full marketing service including:
4.1.1 market research, development and intelligence;
4.1.2 advice to Members on market prospects and intelligence;
4.1.3 facilities for storing soft fruit supplied by members for sale under the Grower's Agreements to the extent that those facilities are necessary for orderly marketing;
4.1.4 such other marketing services as are agreed from time to time.
5 Growers Agreements
5.1 [AG] shall use its best endeavours to ensure that all members observe the requirements of Grower's Agreements.
5.2 [ASF] shall ensure that [AG's] obligations under Grower's Agreements are fulfilled insofar as those obligations are within the knowledge of [ASF].
6 Information
6.1 [AG] shall furnish [ASF] with all such information as [ASF] reasonably requires to fulfil its obligations under this Agreement, including (but not limited to) regular information, estimates and forecasts obtained from members concerning their Produce.
7 Sales of Produce
7.1 Subject to clause 8, [ASF] shall sell every consignment of Produce under such description to such persons in such manner and on such terms of contract as [ASF] reasonably decides.
8 Prices
8.1 In selling Produce under this Agreement on behalf of [AG] (pursuant to [AG's] obligations to the Members) [ASF] shall obtain the best prices reasonably obtainable taking into account medium and long term marketing strategy and the requirement to have regard to the interests of all the Members without favour or preference.
9 Records
9.1 [ASF] shall keep complete and accurate records of all transactions effected by it under this Agreement and shall afford access to any authorized representative of [AG] at all times during normal business hours on not less than 24 hours' prior notice to inspect those records.
10 Ownership of Produce
10.1 The property in every consignment of Produce sold under this Agreement shall not at any time pass to [ASF] but shall remain with the Member supplying the consignment until it passes to the buyer under the contract of sale ...
12 Proceeds of Sale
12.1 [ASF] shall have authority to receive on behalf of [AG] the proceeds of sale of all Produce sold under this Agreement and shall invoice the buyer of every consignment accordingly.
12.3 All proceeds of sale which are received by [ASF], under deduction of [ASF's] commission in terms of Clause 13 below, shall be paid into a bank account specified by [AG] for that purpose.
13 Commission
13.1 [AG] shall pay [ASF] commission for services rendered under this Agreement as follows-
8% of the gross payments received for the sale and supply of Class 1 Produce to supermarkets and other buyers;
2% of the gross payments received for the sale and supply of Class 2 Produce to supermarkets and other buyers.
13.2 The said commission rates will be reviewed annually on each anniversary of the Effective Date.
13.3 Such commission shall be deducted by [ASF] from any monies received from buyers of the Produce before the proceeds of sale are dealt with in terms of clause 12.3 above.
14 Duration
14.1 ... the duration of this Agreement shall be from the effective date until it is terminated by:-
14.1.1 [AG] giving [ASF] not less than one month's written notice; or
14.1.2 [ASF] giving [AG] written notice to take effect on 31st December in the year next following the year in which the said notice is given."
[19] The Agreement could also be terminated in the event of winding up, serious breach and the like. It could be terminated with immediate effect if there was a change in control of ASF. Despite clause 13, the rate of commission varied with the member's turnover. There was no documentary evidence of any review of commission rates in terms of clause 13.2.
AG's relationship with ASF
Use of ASF's know-how
[20] ASF allowed the members of AG to make use of its premium strawberry brand and its new production techniques. If the agency agreement were to be terminated, it would be a matter for discussion between the two companies as to whether those benefits would remain available to members.
Deployment of staff
[21] The registered offices of AG and ASF were at Lochart Porter's farm. Employed there by AG were the company secretary, a supply chain manager, an agronomist and a quality manager and technologist. Apart from the company secretary, the staff were seconded to ASF outwith the season.
[22] AG also employed about 90 to 100 quality control staff at the packhouses during the season. Some additional quality control staff were employed by ASF.
The packhouses
[23] Seven members of AG owned packhouses. They made them available to other members, who paid the owner directly for that service at rates that were centrally agreed. There was no documentary evidence of rates having been set at a company general meeting or at a board meeting. Three members packed their produce on their own farms.
[24] In about February 2010, AG entered into mutual user agreements by which the owners of four of the main packhouses undertook to make their packhouses available to any other member. From this point, a member who made use of another's packhouse paid AG directly at a rate agreed by him and the packhouse owner.
Administration, invoicing, payments and the levy
[25] AG's main customers were supermarkets. Each day, ASF calculated the total volume of fruit that the supermarkets required for the following day. It notified the members of the quantities that they should supply. These quantities were recorded on a computer system to which the packhouse owners had access. The packhouse owners recorded the amounts of fruit that were picked. ASF's staff used this information to allocate fruit to individual orders. ASF arranged the haulage of the fruit to the supermarkets. The packhouse owners then received notice of the customer, product, quantity and haulier. ASF generated electronic invoices and sent them to the supermarkets. Each week ASF sent to the company secretary of AG details of total quantities of fruit sold and the prices obtained. She used this to calculate the payment due to each member.
[26] Before 2009, ASF printed weekly self-billing invoices containing details of purchases from and expenses charged to each member. Each set out the value of the produce. The invoices were headed "Angus Soft Fruits Ltd (Marketing Agent for Angus Growers Ltd)." From 2009 the invoices were headed "Angus Growers Limited."
[27] AG invoiced ASF periodically for the total value of the fruit. ASF then invoiced AG for commission and costs such as haulage. ASF paid the net sum due into AG's bank account.
[28] The company secretary of AG deducted a levy from members of 4.1% and ensured payment of the net sum to members. She sent them individual sales and levy invoices. She collated the figures from these invoices for the purpose of submitting them to the RPA.
The relationship between AG and ASF in practice
[29] There was no contractual provision expressly entitling AG to exercise control over the activities that ASF carried out on its behalf. In the event of a dispute, control could be exercised only by the termination of the agency agreement. This could not be done during the season without disruption and expense. The Land Court concluded that:
" ... the close relationship between AG and ASF and the power to terminate at the end of the season would mean that ASF would, in practice, attempt to comply with any instruction from AG" (para [34]).
The Scottish Ministers objected that there was no evidence for this finding. When settling this Case, the Land Court explained:
"We did not intend to find that there was, in fact, a practice of AG issuing marketing instructions to ASF and our decision was not based on any such finding ... there was no attempt to suggest any reason why ASF would not, in practice, want to try and comply with a request from its principal" (para [9]).
I take this to mean that the Land Court inferred from the circumstances what the likeliest outcome would be if AG were ever to issue an instruction. That inference was based on the background circumstances and, in particular, the power to terminate the agency agreement.
[30] The Land Court found that members of AG were aware of the market and would let ASF know if they were in any way dissatisfied with its services. Members were happy with ASF. It was a most effective marketing agent.
IV AG'S RELATIONS WITH THE RPA
Engagement of a consultant
[31] AG employed a professional consultant, Mr Ian Thompson, who took a prominent part in discussions with the RPA throughout the relevant period.
The RPA booklet (April 2009)
[32] In April 2009 the RPA issued a revised version of its Explanatory Booklet, Fruit and Vegetables Scheme Guidance. This said:
"Marketing: the PO [sc producer organisation] must establish and retain full control of its members' produce at all times. Eligible produce must not travel directly between individual grower members and the marketing agents ...
Outsourcing: Under duly justified circumstances, and with the prior approval of the Agency, it may be permissible for recognized POs to outsource its [sic] activities. In all cases the PO must be able to demonstrate overall control of the activity in question ...
The PO must also provide sufficient evidence that it can carry out its activities properly and effectively ..."
Lochart Porter and John Lang, his successor as chairman of AG, were familiar with this guidance.
The RPA compliance visit, the suspension of AG and AG's response (April - May 2009)
[33] In April and May 2009, the RPA conducted a compliance visit at AG's office. On 9 June 2009, it suspended AG from the scheme. This was its explanation:
"From the evidence initially presented to us, it appears that Angus Soft Fruits (ASF) determine how much fruit is required and advise the members of the PO directly of how much fruit needs to be picked the following day, this is not co-ordinated by the PO.
ASF will raise a self billing invoice that identifies the value of produce sold for each member and passes this over to the PO, the PO will then raise an invoice for the net value of the fruit sold and pass this back to ASF. There does not appear to be an auditable system in place to show that the PO is governing the administration of day to day operations. On the face of it the system in place does not meet the requirements that a PO must maintain a centralised billing and invoicing system.
ASF markets all of the PO's produce. Whilst we agree that ASF are best placed to fulfil this role, the close links between the individual grower members and the marketing agent do not guarantee that the PO has full control over production or marketing.
Additionally failure to market under the Angus Grower name calls into question the visibility of the PO to its customers and in turn whether the PO is acting collectively. Produce is moving from grower to marketing agent to supermarkets without significant PO intervention" (para [47]).
On the point made in the last paragraph, the Land Court found that supermarkets wished fruit to be sold without the name of the producer organisation on the label.
[34] With a letter dated 24 June 2009, Lochart Porter submitted a lengthy and detailed response to the concerns raised by the RPA. I need not go into the details. The response unmistakably affirmed AG's intention to comply with the requirements of the RPA. Mr Porter made the following proposal:
i To change the marketing of "second class fruit" (that is to say, edible
but blemished or otherwise unattractive fruit of the kind rejected by supermarkets - also referred to as class 2 fruit).
ii To provide office accommodation for AG separate from ASF, although
within the same complex.
iii That Lochart Porter should cease to be chairman of AG, and that James Gray should resign as a director.
iv To set up a specific website for AG and obtain appropriate signage for
the office.
In reply RPA said that it would carry out a "full recognition review."
RPA's further visit and AG's response (July 2009)
[35] On 31 July 2009, the RPA made a further visit. On 18 August 2009, Lochart Porter sent to the RPA AG's proposals to meet the difficulties raised by the RPA on the occasion of the visit. He notified the RPA that ASF had sought tenders for new software to allow AG to market class 2 fruit.
[36] On 15 September 2009, Mr Mike Allaway of the RPA wrote to Lochart Porter as follows:
" ... After reviewing all of the evidence presented to me and in recognition of the steps you have taken to rectify initial concerns regarding the PO, I am pleased to confirm that, subject to [AG] addressing the concerns outlined below, suspension of your recognition ... can be lifted. For the present, suspension will remain in force pending receipt of documentary evidence confirming that the necessary changes have been implemented.
1 You must ensure that [AG's] centralised billing and invoicing system is amended to make clear its independence from [ASF].
2 As suggested in your letter dated 24 June 2009, you will resign as Chairman of the PO and James Gray will resign from the Board of Directors. We will require details of your replacements and a copy of the minutes of the meeting where the change is agreed.
3 You must also undertake to review AG's position and capacity to operate as a standalone company. Prior to lifting suspension we will need to see proposals to develop the PO working together as a company and, where possible, undertaking functions currently carried out by ASF, together with an indicative timetable for introduction ... Clearly, we would not want the PO to introduce artificial situations or to spend money unnecessarily, however, given the significant turnover of AG, we would expect to see a business model and activities commensurate with that ...
... Please note that this decision is based on current UK policy for recognition. We may review this policy and your recognition status at any time, in particular, but not only as a result of communications with the Commission.
We note also that [AG] has negligible shared facilities. Whilst this is currently acceptable under UK policy, our position has been challenged by Commission auditors. As a result of this challenge there is a real possibility that in future POs will be required to provide shared facilities for their members. In view of your current circumstances, you should be aware that any such outcome would require us to review your status as a recognised PO ... "
AG's correspondence with the RPA (September - November 2009)
[37] On 30 September 2009, Mr Thompson advised the RPA that the changes to the board of directors had been agreed and that changes to the invoicing procedure had been introduced. In the heading of the self-billing invoices the reference to ASF had been removed (cf para [32], supra).
[38] On 1 October 2009, Mr John Lang, the new chairman of AG, wrote to the RPA. He explained how the three requirements in the RPA letter of 15 September had been implemented. In relation to the third requirement, he set out a detailed action plan to be achieved within the period October 2009 to January 2010.
[39] On 16 October 2009, Mr Thompson sent a copy of the minutes of the meeting at which the changes to the board were made. He thought that this was all the evidence that was needed for the suspension to be lifted, but asked to be told of any other information that was required or of any other issues that needed to be dealt with.
[40] On 26 October 2009, Ms Lockey of the RPA wrote to Mr Lang as follows:
"Thank you for your letter dated 1 October 2009 providing further information on how the PO intends to move forward in 2010. We have also received information from [Mr Thompson] and copies of the new invoices the PO is now using.
In view of the changes already made and further changes proposed, recognition of [AG] will be maintained, however the RPA will review the governance of the company again in early 2010.
There has been a development at European level that means we cannot lift the suspension yet, however. I refer to Mike Allaway's letter dated 15 September 2009, where he informed you of the UK's current policy on shared facilities and the challenge made to this by Commission Auditors. You may be aware that France challenged the Commission on this issue through the European Court of First Instance. The Court has recently issued a judgment on the case in favour of the Commission and this has an immediate impact on current UK policy. We are working urgently with Defra to revise UK policy in line with the law as now stated. Until this policy is settled and we know that [AG] falls within it, we will not be able to lift the suspension on [AG's] recognition status.
We will be writing to all POs very soon to explain the position more fully and to establish what facilities are currently shared within each PO. [AG] will of course be included in this exercise.
In the meantime as you currently have negligible shared facilities, I would suggest that you formalise arrangements for sharing packhouses and consider what assets are owned by members individually that might otherwise be provided by or through the PO."
[41] On 6 November 2009, Mr Thompson wrote to Mr Allaway expressing AG's continued disappointment that the suspension remained in place. He gave detailed information in response to the RPA's continued objections. He listed the shared facilities provided by AG, one of which was said to be marketing of members' produce through the agency of ASF. He set out detailed arguments for the lifting of the suspension.
RPA's new policy statement to all producer organisations (December 2009)
[42] On 18 December 2009, the DEFRA and the RPA wrote to all producer organisations with the following revised statement of policy in the light of France v Commission (supra):
"In summary the policy clarifies that POs must own or have responsibility for provision to members of all necessary facilities as defined in ... [the Council Regulation]. These must include facilities for the collection, storage, packaging and marketing of members' produce (subject to limited exceptions). The policy allows that these facilities may be provided through PO members but POs must be able to demonstrate their control and are responsible for any facility provided in this way."
The policy dealt with outsourcing as follows:
"Outsourcing. Note: ... Care must be exercised when outsourcing activities to
other members of the PO - especially where this is a historical arrangement, i.e. simply to formalize existing undocumented arrangements, especially if they were not preceded by any formal quotation or tender process for the work, or a sufficient survey of the market for such activities ... If POs are in any doubt as to the rules on outsourcing or their responsibilities in this matter then they should contact the Scheme Management Unit for advice, however the onus remains with POs to ensure they comply with regulatory requirements."
AG's correspondence with RPA (January - March 2010)
[43] On 15 January 2010, Mr Thompson sent to Ms Lockey a copy of the Growers Agreement between members and AG. The RPA's reply dated 20 January 2010 raised the following further difficulties:
"In the agreement provided the onus is on the members to grade, pack and label produce and also deliver the consignment. The Agreement also states that the PO and the Grower [member] must provide facilities for storing fruit (cl 8). Marketing arrangements as they appear in the Agreement are acceptable.
To be acceptable under the provisions of the criteria published on 18 December 2009 the PO must undertake activities for and on behalf of the members. It is not acceptable for the PO to rely on the members to do things for themselves without PO direction and control. This needs to be reflected in the Members Agreement, but the control must be real effective and capable of withstanding scrutiny as to how it works - or might - in practice. It must not be a paper exercise.
We also require mutual use agreements for the packhouses used by the PO.
Can you please also provide more information on the collection facilities provided. You have advised us the PO collects members' produce using a refrigerated wagon owned by the PO. Does this vehicle collect all members' produce? Do members also arrange their own transport?
In light of the above, AG will remain suspended from the scheme until these issues have been addressed."
The clause on marketing in the Growers Agreement to which the RPA referred was as follows:-
"The Company [AG] shall sell all fruit offered for sale under this Agreement under such descriptions to such persons and in such manner as the Company decides for the best prices reasonably obtainable taking into account considerations of medium and long term marketing strategy and the duty of the Company to have regard to the interests of all the participants without favour or preference" (para [56]).
[44] On 28 January 2010, Mr Thompson e-mailed to Ms Lockey a revised Growers Agreement and a draft mutual user agreement.
[45] On 3 February 2010, Ms Lockey wrote to AG as follows:
"Once you have provided suitable evidence that your PO meets the requirements set out in the judgement [sc France v Commission, supra] and of the UK's revised policy on technical means (guidance on this issue was published on 18 December 2009) suspension can be lifted. Please note that this must be provided within twelve months from the date of suspension."
In this letter Ms Lockey said that the date of the suspension was 20 January 2010. At about the date of this letter, mutual user agreements for the packhouses were entered into and the arrangements for payment were altered.
[46] On 5 March 2010, Mr Thompson sent to Ms Lockey a copy of the final version of the Growers Agreement and asked for confirmation that the suspension would now be lifted.
[47] On 8 March 2010, the RPA wrote to say that it was unacceptable that AG did not provide collection facilities. The RPA also sought clarification of a clause 14 in the Growers Agreement. This could not be given until 10 March 2010. The Land Court concluded that the RPA's concern about the relevant clause was based on a misunderstanding of its meaning. The Ministers do not challenge the Land Court's interpretation of that clause.
RPA's withdrawal of recognition (March - April 2010)
[48] On 10 March 2010 there was a telephone call between Mr Thompson and staff at the RPA. On the following day, the RPA told AG by telephone that its recognition as a producer organisation would be withdrawn.
[49] By letter dated 16 March 2010, the RPA withdrew the recognition of AG with effect from 1 January 2008. The effect of that decision was to cut off AG from financial assistance and to oblige it to repay the assistance that it had received for over twenty-seven months.
V THE RPA DECISION AND THE ADMINISTRATIVE APPEALS
The decision and reasons
[50] The RPA's letter of 16 March 2010 was written by Mr Mike Allaway. It was in the following terms:
"Fresh fruit & vegetable aid scheme - recognition review
I refer to previous meetings and discussions surrounding the recognition of Angus Growers Producer Organisation (PO) following the concerns raised as the result of Compliance Audit checks in 2009.
In my letter dated 15 September 2009, we agreed that the suspension of the PO from the scheme could be lifted once our concerns outlined in that letter had been addressed. My letter dated 20 October [sic] advised that we would review the governance of the PO in early 2010.
The recent documentation you have submitted in relation to the provision of shared technical facilities and the most recent compliance audit visit demonstrate that some steps have been taken to address the issues raised. However there remain major concerns surrounding Angus Growers compliance with recognition requirements - I have noted them below.
1. The invoicing system is still heavily reliant on information passed to
the PO from the Marketing Agent - Angus Soft Fruits (ASF).
2. Of the seven packhouses used by the PO, four are used by several members and three are owned and used by individual members For these three, we understand that these members pick, store (if necessary), pack and deliver their own produce. There are no mutual use agreements for these packhouses. Consequently, the PO has limited involvement with these members and increasing the POs VMP [value of marketed production] could appear to be the sole benefit to the PO of these growers' membership.
3. The PO does not organise collection of the produce after harvest for delivery to the packhouse. Although the PO has introduced rules on collection, this is currently a paper exercise. Whilst this may not be an issue on its own, along with the other concerns that we have, it reinforces our overall concern in relation to the structure of and control mechanisms employed by the PO.
4. The most recent visit also raises concerns that PO members are not involved in any decision making. The PO relies heavily on the use of their independent consultant in relation to the operational programme, with limited involvement of the PO and constituent members.
We also requested that more steps were taken to review the PO's position and capacity to operate as a standalone company. Although some progress has been made, this has not been addressed sufficiently. The PO are still heavily reliant on Angus Soft Fruits. The PO does not play a significant role in the concentration of supply and marketing of the members' produce. It is using historic marketing channels that were in place prior to the set up of the PO and in this area there has been minimal change since the PO obtained recognition. If the PO ceased to exist it appears likely that the members would continue to supply the Marketing Agent, there does not appear to be any added value resulting from membership of the PO.
Commission Regulation (EC) 1580/07. Article 116(1) states:
'Member States shall in particular withdraw the recognition of a producer organisation if a failure to respect the criteria for recognition concerns:
(a) a breach of the requirements of Articles 23, 25, 28(1) and (2) or 33'
The PO is in breach of this Article, specifically in its failure to address Article 25 concerning the structure and activity required of a producer organisation. Consequently we must withdraw the recognition of the PO from the date of this letter.
Please note that criteria for recognition has [sic] not changed since the PO was recognised under Commission Regulation (EC) No 2200/96. This Regulation has been amended and recognition criteria is [sic] now detailed in Commission Regulation (EC) No 1234/07 Article 125b.
I appreciate you will be disappointed by this decision. Appeals against this decision can, in the first instance, be made to ... [address]"
The administrative appeals to the Scottish Ministers
[51] AG exercised a right of administrative appeal to the Scottish Ministers (Common Agricultural Policy Non-IACS Support Schemes (Appeals) (Scotland) Regs 2004 (SSI No 278)). The Regulations prescribed a stage 1 and stage 2 appeal. In this case an informal stage was interposed, because the Ministers reconsidered their stage 1 decision before AG took the matter to stage 2. There were therefore three appeal decisions in all. The appeals were futile. The written determinations in these appeals have not been produced. AG then appealed to the Land Court against the stage 2 decision.
[52] The Land Court considered that the Scottish Ministers' stage 2 decision had been "inadequately expressed." It also lacked any discussion of the questions of law that arose. It seemed to the Land Court that the Scottish Ministers had found these questions "too difficult to bother with" (para [111]). They had not considered the question whether any failure was caused by serious negligence.
[53] The Land Court inferred from the Ministers' ultimate stance before it that at some point they took a formal decision that serious negligence had been established. It commented that the detail of that decision and the reasons for it had not been disclosed to it (para [162]). It is apparent that the Scottish Ministers preferred to defend AG's appeal to the Land Court on the basis of their own re-formulation of the stage 2 decision in their pleadings rather than on the decision as intimated to AG (paras [86], [111], [113]).
VI THE LAND COURT'S DECISION
The Ministers' restricted defence
[54] The decision letter of the RPA set out four specific reasons for its concerns. Before the Land Court the Scottish Ministers defended the decision essentially on two issues; namely (1) the provision of packhouses, and (2) the control exercised by AG over ASF (para [113]]). In my view, only the first of these was foreshadowed in the RPA's decision letter. That issue was decided by the Land Court against the Ministers. They do not question that conclusion in this court.
[55] The Ministers also conceded that the RPA was wrong to proceed on the basis that serious negligence need not be established (para [69]); but they maintained that it was correct in proceeding on the basis that it need not give separate consideration to the question whether the failure was substantial.
The Land Court's assessment of the Scottish Ministers' defence
[56] The Ministers having failed on the packhouse question, the substantive issue in their defence was whether AG remained "responsible for ensuring the carrying out of that activity, and overall management control and supervision of commercial arrangement for the provision of the activity" (Commission Regulation, art 29), the activity being those aspects of marketing that were outsourced to ASF. It was common ground that this provision imported a requirement for control, something which the Land Court said had "not proved helpful" as a test in applying articles 25 and 29 to the present case (para [125]).
Was there a failure by AG to respect the criteria for recognition?
[57] The Land Court found that the members exercised control through company general meetings and also informal meetings. In this respect, the company was "functioning in a straightforward fashion" (para [106]). The Land Court made a limited finding that AG had breached the Regulation in respect of its supervision of the work of ASF. It made an exhaustive assessment of the various aspects of the question (paras [122]-[153]). I think that its ratio decidendi on the point can be found in the following three conclusions:
"We are satisfied that the right to terminate a contract can give effective management control in many circumstances. Where this can be done in a comparatively short period the practice [sic] level of control increases. But this depends on the nature of the activity outsourced and on the respective bargaining powers" (para [136]).
"We are satisfied that the power [of AG] to terminate the [agency] arrangement [with ASF] on short notice [ie. one month] was a powerful indicator of control but we have come to conclude that this required to be augmented by a proper system of assessment so that, in effect, the management was actually exercised ... the essential element which ... was missing was evidence of any positive decision as to whether or not the right to terminate the contract should be exercised" (para [151]).
"We do not accept the lack of [contractual] power to impose any such constraints was, in itself, enough to indicate a breach, but we do consider that it required to be balanced by some identifiable system for assessment of the commercial arrangements under which the outsourced activity was to operate" (para [153]).
An example of the lack of monitoring was the absence of scrutiny of the levels of commission charged by ASF (para [153]). AG does not seek to disturb that finding. The Scottish Ministers submit that the Land Court did not go far enough. They say that it should have found that the lack of a contractual power of supervision was a violation per se.
Was the failure substantial?
[58] The Land Court found that the failure that it had identified was not "substantial." Whether the failure could properly be so characterised depended upon the particular circumstances (para [94]). It found that the lack of a formal system of appraisal made no significant difference. In reality members of AG could raise concerns about ASF if the need arose. The need never arose. ASF had performed well (para [154]). At its strongest, Mr Allaway's evidence seems to have been that he did not regard any specific breach as serious, but that he contended that matters "taken in the round" were substantial (paras [86], [154]). RPA's stated concerns having been variously departed from or found to be unsound, the Land Court's conclusion was unsurprising.
Was the failure caused by serious negligence?
The Land Court's interpretation of "serious negligence"
[59] The Land Court was satisfied that there was no serious negligence for three main reasons: (i) the attitude of AG to the failure; (ii) AG's reliance on the RPA; and, (iii) the fact that the failure was not obvious. It reached that conclusion without having to consider "any close definition of the meaning in the present context" (para [160]). I infer that its decision was clear-cut; and that it was satisfied that whatever subtleties existed as to the meaning of serious negligence, the failure of AG did not come within it. In the Court's view, the term was not to be governed by the common law doctrines of negligence, although carelessness was essential. It thought that "some element of disregard of the need to comply" would be required (para [160]).
The attitude of AG to the failure
[60] The Land Court had regard to AG's attitude to the failure (para [161]). It noted AG's positive attempts to identify areas where it was falling short and to deal with them (para [160]). AG had not "knowingly shut their eyes to any obvious failures" (para [162]). AG's close communications with the RPA, and its willingness to co-operate with it, made it impossible to conclude that there was serious negligence (ibid). There was no significant failure to disclose matters to the RPA, far less consciously to conceal anything (para [163]).
Reliance on the RPA
[61] The Land Court found that AG had acted with the assistance of the RPA. It was entitled to regard the RPA as a skilled specialist (para [160]). Its literature said that a producer organisation should seek advice from it on any point of doubt. That was what AG had done (para [163]). AG was paying attention to the RPA's advice and was trying to comply with it (para [164]).
Lack of obvious failure
[62] The Land Court decided that AG had a "stateable answer" to all of the RPA's allegations. The breaches now relied upon had not been clearly spelled out before the RPA's decision to withdraw recognition (para [162]). They were not clearly focused until the Ministers' pleadings were lodged (para [161]).
The Land Court's overall conclusion
[63] The Land Court thought that AG could have been more active. It observed that AG had largely reacted to the concerns of the RPA instead of seeking legal advice when its recognition was suspended, or seeking its consultant's view as to what the Regulations required (para [165]). On the other hand, the consideration that had led the Land Court to view AG's failure as being insubstantial was also relevant (paras [161], [165]). In practice, the arrangement with ASF was working well. There was no impetus to change things. The level of monitoring desiderated by the Land Court might have made little practical difference (para [165]). The Land Court therefore allowed the appeal and set the decision aside.
VII THE SPECIAL CASE
The questions of law
[64] The Scottish Ministers have requisitioned this Case on the following questions:
(1) Did the Scottish Land Court err in holding that the failure to respect the criteria for recognition which it had identified was not "substantial" for the purposes of article 116(1) of Regulation 1580/2007?
(2) Did the Scottish Land Court err in holding that the failure to respect the criteria for recognition did not result from serious negligence, as that term is to be understood in the context of article 116(1), on the part of the appellant?
If the appeal is to succeed, the Ministers must succeed on both questions.
The submissions for the parties
For the Scottish Ministers
[65] The Scottish Ministers submitted that a contractual power of control was necessitated by the requirement that a producer organisation should provide sufficient evidence that it could effectively provide services to its members over time in an appropriate manner (eg Council Regulation, arts 4(1)(c), 6). The Ministers insisted on this point, although they did not regard it as essential to their argument in view of the Land Court's finding that effective control was not exercised in practice.
[66] The Ministers submitted that the lack of control, however viewed, was per se a substantial failure. It concerned the entire marketing function of AG. The provision of that function was a compulsory requirement for recognition (Council Regulation, art 3(1)(e)). The Commission Regulation (art 116 (1)) provided that Member States should "in particular withdraw the recognition" for breaches of article 25. The improper outsourcing of marketing meant that AG must be taken to have breached article 25(c) in failing to have at its disposal the means necessary to ensure its essential functioning regarding commercial management.
[67] By taking an incorrect approach to this question, the Land Court could not properly deal with the question of serious negligence. In any event it had not applied the correct test. The references to the "disregard of the need to comply" and to the question whether AG had "knowingly shut their eyes to any obvious failures" would be apt only in a test for recklessness. The Land Court placed excessive reliance on the communications between AG and the RPA. Circulars from RPA had referred to the need for the producing organisation to maintain control over outsourcing. The RPA had raised concerns about the relationship between AG and ASF at an early stage. The Land Court erred in taking account of the performance of ASF.
For AG
[68] AG submitted that the reference in article 29 of the Commission Regulation to "overall management and control" envisaged control at a high level, rather than management of day-to-day decisions. The Agreement between AG and ASF had asymmetrical notice periods for termination that favoured AG. ASF was to provide an administration service subject to AG's directions (cl 3.1.1) and to enable AG to fulfil its obligations to its members in terms of the Growers Agreement (cl 5.2). The members were knowledgeable farmers well placed to know whether ASF was performing satisfactorily. The Land Court's finding concerned a narrow failure to exercise active supervision. Article 116 did not refer in terms to a breach, but rather to "a failure to respect" the requirements. The Land Court was entitled to find that any failure did not go to the substance of the Regulations' requirements and therefore was not a substantial failure to respect them.
[69] The failing was properly analysed as a breach of article 29 rather than article 25, which made no reference to control. A violation of article 29 was not a substantial breach per se for the purposes of article 116. Article 29 was not enumerated in article 116. In any event, the words "in particular" simply listed matters that a Member State must treat as a breach. It did not say whether the breach must be regarded as substantial.
[70] The approach of the Land Court to the question of serious negligence was consistent with Intertanko (supra). AG's close attention to RPA's advice and its attempts to comply with it were inconsistent with serious negligence.
VIII CONCLUSIONS
The context of the RPA's decision
[71] For a proper appreciation of the issues in this Special Case, it is important to review the RPA's handling of the case and the history that led to its drastic decision to withdraw recognition.
[72] The starting point is that outsourcing of activities by a producer organisation, the cause of the RPA's concerns, is expressly permitted by the Council Regulation (art 6). The only qualification to that is that the producer organisation must satisfy the RPA that outsourcing is an appropriate way in which to achieve the objectives of the organisation. It is not suggested in this case that outsourcing was not an appropriate way in which to achieve the objects of AG. The power to outsource entitles the producer organisation to enter into a commercial arrangement with another entity, including one of its members or a subsidiary, for the provision of the relevant activity. Nonetheless, the producer organisation remains responsible for the carrying out of the activity and for overall management control and supervision of the outsourcing arrangement (Commission Regulation, art 29; art 27).
[73] AG had been recognised as a producer organisation since 2002. It had outsourced its marketing functions, legally, to ASF. The Ministers have been preoccupied in this appeal with the relationship between AG and ASF; but they have never suggested, and in my view could not suggest, that the contract between AG and ASF was not genuine and valid. On the contrary, all the evidence establishes that the contract was fully implemented; that its implementation was considered to be successful by AG and its members, and that ASF was a most effective marketing agent.
[74] By letter dated 9 June 2009 the RPA suspended AG from the scheme for reasons that, in my view, were not convincing. However, I shall assume in favour of the RPA that the reasons set out in that letter were sufficient to justify the suspension. It is the conduct of AG in consequence of the suspension that has given rise to the issues in this case.
[75] AG and its consultant repeatedly attempted to meet RPA's changing requirements for the lifting of the suspension. Its chairmen familiarised themselves with the RPA's Guidance Booklet of April 2009. Mr Porter responded to the suspension letter with a detailed proposal to meet the RPA's concerns. In response to the RPA's further visit of 31 July 2009, he notified the RPA that ASF had sought tenders for new software to allow AG to market Class 2 fruit.
[76] In my opinion, the findings of the Land Court amply warrant the conclusion that AG made a genuine and purposeful attempt to comply with the Regulations and with the RPA's specific demands.
[77] The RPA's letter of 15 September 2009 suggested that a resolution of the matter was in sight. The RPA indicated its intention to lift the suspension on the fulfilment by AG of three conditions. The letter also looked further ahead in warning AG of possible policy changes that might affect its recognition as a producer organisation; but, as matters then stood, AG was entitled to conclude that if the three conditions were met, the suspension would be lifted immediately.
[78] The Land Court's findings suggest that in its actions in response to that letter, AG achieved substantial compliance with the RPA's conditions. If matters had come to a head at that point, it could not have been seriously suggested that AG was guilty of a substantial failure caused by serious negligence.
[79] The RPA's letter of 26 October 2009 is therefore a significant turning point. It gave notice that in view of the changes already made and the further changes proposed by AG, the RPA would maintain recognition of AG, subject to a governance review in early 2010; but that in light of France v Commission (supra) it could not yet lift the suspension.
[80] In that state of matters, there could be no conceivable justification for the withdrawal of recognition. On the contrary, in my view, AG had reasonable cause to expect that the suspension would be lifted. Instead, the RPA raised the new issue of the packhouses, in consequence of France v Commission (supra), as a basis for keeping the suspension in force.
[81] As a statement of reasons for that decision, the letter of 26 October 2009 left much unsaid; but what is clear is that from that date the suspension was being maintained in force for a different reason from that for which it had been imposed, and that maintaining the suspension in force enabled the RPA to temporise for a further two months while new policy guidance was being prepared.
[82] In response to this, and to distinguish AG's position from that of the producer organisations in France v Commission (supra), Mr Thompson by letter dated 6 November 2009 notified the RPA of the shared facilities provided by AG to its members.
[83] On 18 December 2009 the DEFRA and the RPA issued the new policy statement (supra, para [42]). Its opacity suggests that the RPA itself was uncertain of its own policy stance. On the central issue affecting AG, the statement said only that "care must be exercised" when activities were outsourced to other members of a producer organisation. The statement suggested that if producer organisations were in any doubt as to the rules of outsourcing or their responsibilities in the matter - an almost inevitable consequence of the policy statement - they should contact the Scheme Management Unit for advice. That suggests to me that instead of enunciating a clear policy, the RPA hoped to deal with the problems case by case. The studied vagueness of the statement is highlighted in the final sentence that I have quoted, where the RPA took shelter behind the reminder that the onus remained with the producer organisations to "comply with regulatory requirements," such compliance being precisely the purpose of issuing guidance.
[84] By email dated 15 January 2010, Mr Thompson sent the Growers Agreement to Ms Lockey in an attempt to meet the RPA's continued objections. By email dated 20 January 2010 Ms Lockey intimated that the suspension would remain in force until AG dealt with a number of queries and objections that she there set out. By email dated 28 January 2010, Mr Thompson sent her a copy of the amended Growers Agreement and a draft mutual user agreement. An internal email by Mr Thompson dated 2 February records that Ms Lockey had confirmed to him that these latter documents were fine. If that was Ms Lockey's view then, it was a view from which she soon departed. By letter to AG dated 3 February 2010 Ms Lockey notified AG that once it had provided suitable evidence that it met the requirements set out in France v Commission (supra) and in the revised policy statement, the suspension could be lifted. The letter asked AG specifically to note that this evidence had to be provided within twelve months of the date of the suspension. At about that time, mutual user agreements for the packhouses were concluded and the arrangements for payment were altered.
[85] On 5 March 2010 Mr Thompson sent to Ms Lockey the final version of the Growers' Agreement and asked her to confirm that the suspension was now lifted. On 8 March 2010 Ms Lockey replied that she would need to seek clarification that clause 14 was acceptable and that it was not acceptable that AG did not provide any collection facilities for its members. She said that unfortunately she would not be in a position to clarify these points until 10 March. By email on 10 March, Mr Thompson gave a lengthy and reasoned answer to Ms Lockey's request for clarification of clause 14. The Land Court thought that the meaning of the clause was clear. I think that the meaning of the clause is clear. So do the Scottish Ministers.
[86] On 11 March Ms Lockey telephoned Mr Thompson and told him that AG's recognition was to be withdrawn.
[87] What emerges from all of this is that as matters stood on 8 March 2010 the issue concerned the lifting of the suspension. By then AG had received an assurance from the RPA that if suitable evidence could be provided to it by the anniversary of the suspension, the suspension could be lifted.
[88] Yet three days later the RPA told AG that its recognition was to be withdrawn. It is remarkable that the RPA should at this point have sprung this upon AG. There had been no threat of that in its recent correspondence with AG. On the contrary, the RPA had told AG of the date by which the evidence necessary for the lifting of the suspension had to be submitted; and AG had not had an opportunity to respond to Ms Lockey's apparent difficulty in understanding a straightforward clause in the Growers' Agreement.
The decision letter
[89] The suddenness of the RPA's volte face requires us to examine the reasons given in the decision letter of 16 March.
[90] It was for the RPA to specify in what respect the failure alleged consisted. Since it relied on article 25, it was for the RPA to specify which of the duties set out in paragraphs (a) to (d) of article 25 applied. It was then for the RPA to specify, if that was its view, why the failure was substantial and why it was caused by serious negligence (art 116(1)).
[91] The decision letter first sets out the factual basis on which the decision is founded; namely four specific complaints relating to (i) invoicing; (ii) packhouses; (iii) collection facilities and (iv) decision-making; and a generalised complaint that AG does not play a significant role in the supply and marketing of its members' produce.
[92] These factual complaints are, to say the least, of doubtful relevancy and specification; but it is in the professed legal basis of the decision that we can see the fundamental flaw.
[93] The decision letter founds upon articles 116(1) and 25 of the Commission Regulation. Mr Allaway quotes article 116(1) in the following words:
"Member States shall in particular withdraw the recognition of producer organisation if a failure to respect the criteria for recognition concerns: (a) a breach of the requirements of Articles 23, 25, 28(1) and (2) or 33."
That is of course a misquotation of article 116. I have already quoted the true version. It provides inter alia that Member States shall withdraw recognition of a producer organisation
"if a failure to respect the criteria for recognition is substantial and results from the fact that the producer organisation acted deliberately or by serious negligence ... "
[94] Mr Allaway then says:
"The producer organisation is in breach of this Article [sc Article 116(1)], specifically in its failure to address article 25 concerning the structure and activity required of a producer organisation. Consequently, we must withdraw the recognition of the producer organisation from the date of this letter."
[95] Counsel for the Scottish Ministers conceded, rightly in my view, that the writer of the letter erred in this last passage by failing to consider whether the supposed "failure to address article 25" was the result of serious negligence. In my view, the writer erred also in failing to consider whether the supposed failure was "substantial." Instead, the writer based the decision on the plainly erroneous proposition that, having failed to address article 25, AG was in breach of article 116(1), and that in consequence the RPA "must" withdraw recognition. Since the RPA therefore failed to take into account the questions whether the alleged failure was substantial and whether it resulted from serious negligence, the decision, in my opinion, was fundamentally flawed.
The agreement between counsel in the Land Court proceedings
[96] On the view that I have taken, I find it surprising that Mr Aidan Robertson QC of the English Bar, who appeared for AG with the permission of the Land Court, did not argue against the validity of the decision letter; but instead agreed with counsel for the Scottish Ministers that the appeal should be decided on the case that was set out in the Scottish Ministers' pleadings.
[97] That, I think, was an ill-advised concession. It enabled the Scottish Ministers to plead a case based on article 29, which was not mentioned in the decision letter; and thereby to advance an ex post facto rationalisation of the RPA's decision. In this way the appeal came to be decided on two new issues under article 116(1) affecting AG's relationship with ASF, namely substantial failure and serious negligence.
[98] This case should have been decided on the question of the validity of the decision letter. If it had been so decided, the result would, in my opinion, have been clear cut. Instead, the parties have required us to decide this appeal on the question whether the Land Court erred in its conclusions on the two new issues, neither of which, in my view, need have arisen.
The test to be applied
[99] There are two ways in which a specialist court such as the Land Court may be said to have erred in its conclusion on the application of an enactment. There may be an error on the face of its decision as to the meaning of the enactment; or the facts found by it may be such that no court acting judicially, and properly instructed as to the relevant law, could have decided the case as it did (Edwards v Bairstow [1956] AC 36, Viscount Radcliffe at p 36). If the Land Court sets itself the correct legal question, and answers that question consistently with its having its understood the correct meaning, it is not for this court to interfere, even if it might have answered the question differently.
[100] If the Land Court correctly interpreted articles 25 and 116(1) (supra), the questions whether the failure was substantial and whether it resulted from serious negligence were essentially matters for the Court to judge by applying its knowledge and expertise to its findings of primary fact. This court should not interfere with such a judgment unless it is manifestly unreasonable (cf Jardine v Murray 2012 SC 185). To succeed in their defence to AG's appeal, it was of course essential for the Ministers to succeed on both questions. They failed comprehensively on both. For the reasons that I shall give, I consider that we have no cause to interfere with the Land Court's decision on either issue; and that its decisions on both points were amply warranted by its findings.
Was there a failure to comply with the Regulations?
[101] I am not persuaded that AG breached the Regulation at all. In my view, article 29 does not create an obligation of control. The first sentence defines what is meant by outsourcing. The second sentence does not qualify, restrict or enlarge the definition. It merely provides that the use of outsourcing does not elide the obligation of the producer organisation to ensure that certain objectives are achieved. If the provision of services by the third party is inadequate to ensure that those objectives will be achieved, the producer organisation will be held responsible. In short, outsourcing is a means by which a producer organisation carries out its obligation, and not a means by which it discharges it (cf France v Commission, supra, at para (59)).
[102] In this case, ASF was most successful in placing members' produce on the market. It follows, in my opinion, that the essential functions of the producer organisation were being implemented.
[103] The Scottish Ministers specifically press the question whether the Land Court went far enough in finding that AG had breached article 25(c), read with article 29, of the Commission Regulation only by a failure to exercise supervision in practice. They submit that the Land Court should have found that the lack of de iure control through the agreement between AG and ASF was, in itself, sufficient to establish a breach. That, in my view, reads too much into the Regulation. Even if an obligation to control the activities of the third party were to be implied in article 29, I would see no reason to conclude that such control must include a contractual mechanism entitling the producer organisation to give specific directions as to price, and so on.
If there was a failure, was it substantial?
[104] Assuming that there was a failure to respect the criteria for recognition, I consider that the Land Court was entitled to find that the failure was insubstantial.
[105] The Scottish Ministers submit that the nature of the failure was such that it was substantial per se. That submission is unsound. Even if obligations can be read into article 29, it does not follow that a breach of article 29 constitutes a breach of article 25. The obligation on the producer organisation is to have at its disposal the infrastructure necessary to fulfil the requirements of recognition and to ensure that it functions effectively. Article 29 ex hypothesi prescribes how that can be achieved; but a breach of article 29 is not necessarily a breach of article 25.
[106] In any event, the Ministers' construction of the words "in particular" in article 116 is untenable. "In particular," in its context, means "especially," or "including, but not exclusively." That is how those words are used in article 25. They are used repeatedly in the Regulation. They appear in the preamble seven times. If the intention of the Regulation had been that all breaches of article 25 would be "substantial" for the purposes of article 116, the Regulation could readily have said so. I cannot construe the Regulation as implying that a certain meaning should be attributed to "in particular" only where it appears in article 116.
[107] In my view, the Land Court's finding that the RPA's suggested level of supervision would have made no practical difference to ASF's manner of operation amply justified its finding that there was no substantial breach. If I am right in that conclusion, that is an end of the appeal.
If there was a substantial failure, was it caused by serious negligence?
[108] In my opinion, the Scottish Land Court was entitled to find that in any event AG was not guilty of serious negligence.
[109] I do not think the Land Court's approach to this issue was affected by its conclusion on the question of substantial failure. The Land Court explained at the outset of its discussion that its assessment of serious negligence was "reached without much difficulty" (para [89]) and that it had reached a "clear view" on that question, thereby obviating the need for a reference to the European Court (para [90]). The whole tenor of its discussion was that its judgment turned on the question of serious negligence. It said that its aim had been "to give an indication of some of the wider issues raised by some of the expressed concerns rather to express a conclusion" (para [88]).
[110] The Land Court's proposed definition of serious negligence, reached without the benefit of relevant authority, is remarkably close to that given by the European Court in Interanko (supra). The Land Court identified the need for some form of carelessness and "some element of disregard of the need to comply" (para [92]). This is close to the reference in Intertanko to unintentional conduct amounting to a patent breach of the duty of care, the assessment of which depended inter alia on the relevant person's knowledge. For a breach to be patent, it must be obvious. To fail to address the obvious might be said to involve some element of disregard. The Land Court assessed AG's attitude and lack of wilful blindness along with a series of other relevant considerations, treating none as determinative and giving each matter such weight as it thought that it deserved. I can see no basis on which we could disturb its conclusion on the point.
[111] My own view is that the Land Court's analysis of AG's communications with the RPA was sound. Whether the RPA had focused on the failure was relevant to AG's knowledge and to the question whether any failure was patent. Although circulars referred to a control requirement, the RPA raised no specific concern regarding the level of control exercised by AG over ASF. This was despite RPA's extensive inquiries of AG, AG's full co-operation and RPA's detailed criticisms and concerns about other matters. The closest that we come to an identification of AG 's alleged failure is in the RPA's general anxiety about AG's relationship with ASF and its concern about the close links between AG's members and ASF (cf letter of suspension dated 9 June 2009). The concern was that ASF was too closely linked to the members and, because of that, was by-passing AG: hence the RPA's assertion that "close links between the individual grower members and the marketing agent do not guarantee that the PO has full control" (supra). On this issue the RPA's later expression of its intention to maintain recognition (cf letters of 15 September and 26 October 2009, supra) was consistent with the conclusion that its concerns had been allayed.
[112] In my view, the Land Court's finding on this point was inevitable in view of the RPA's lack of specification of the relevant failure before recognition was withdrawn. But in any event, there is a clear history that demonstrates AG's active co-operation with the RPA, its employment of specialist advice and help, its repeated attempts to meet the successive difficulties and objections raised by the RPA and its positive responses to the RPA's refusals of its entreaties to have the suspension lifted. That history, in my view, was such that an accusation of serious negligence on the part of AG was bound to fail.
IX REFERENCE TO THE EUROPEAN COURT OF JUSTICE
[113] Since we are "authorised finally to determine" the questions of law settled by the Land Court (Scottish Land Court Act 1997, s. 1(7)), there is no right of appeal to the Supreme Court. We are therefore a court against whose decisions there is no judicial remedy (Treaty of the European Union, art 23). Therefore, where a question of interpretation of the Regulations arises, the resolution of which is necessary for us to give judgment, we must refer that question to the European Court (ibid.). Where necessary we must take the initiative even if the parties do not request a reference (Willy Kempter KG v Hauptzollamt Hamburg-Jonas [2008] 2 CMLR 21, at para [41]).
[114] A question does not arise where there is no scope for any reasonable doubt about the correct answer. The answer must be obvious to us, to any other court of a Member State, and to the Court of Justice, regard being had to the potential for divergent judicial approaches (CILFIT Srl v Ministro della Sanita' [1983] 1 CMLR 472).
[115] Where grounds exist independent of that question, which are adequate to determine the case, resolution of the question is unnecessary. In such a case, the answer to the question cannot affect the outcome (ibid).
[116] On the view that I have reached of the Land Court's approach to serious negligence, no question of construction needs to be resolved in order to determine this case. I do not, in any event, entertain any doubt about the answers to the other questions of law raised by the Scottish Ministers.
X VERDICT ON THE RPA
[117] Between the imposition of the suspension in June 2009 and the withdrawal of recognition in March 2010 the RPA took a close interest in AG's conduct of its business and its relationship with ASF. The history that I have narrated shows that throughout that period the directors of AG and its consultant dealt with RPA's concerns in a constructive and co-operative way.
[118] As the RPA's letter of 15 September 2009 made clear, the issue between the RPA and AG was when, and on what terms, the suspension could be lifted. That remained the issue even after the publication of the DEFRA/RPA amended policy guidance, such as it was.
[119] By 3 February 2010 the RPA was holding out positive hope to AG that on the production by AG of certain further evidence, the suspension could be lifted. AG took further positive steps in reaction to that letter; but on 8 March 2010 the RPA raised new difficulties in a letter that some might think was insincere.
[120] As matters stood on 10 March 2010 the correspondence with the RPA gave AG no reason to think that its recognition was in any danger of being withdrawn, or that that possibility was even being considered by the RPA. Yet on the following day it told AG that its recognition would be withdrawn.
[121] The RPA then sent a decision letter in which it set out four factual reasons, all of which fell away by the time this case reached this court. The conclusion of the decision letter, which set out the professed legal basis for the decision, was based on an obtuse misunderstanding of the legislation, for the reasons that I have given.
[122] Despite its familiarity with AG's affairs, the RPA failed to set out a clear allegation relating to AG's supposed failure to exercise sufficient control over ASF. The Scottish Ministers acknowledge that the decision letter did "not focus on the issue of control of ASF in terms" (Note of argument, para 27). That is an understatement. AG was justified in thinking that the problems raised by the RPA during their correspondence had been dealt with to the RPA's satisfaction.
[123] It is not surprising that before the Land Court the Scottish Ministers presented a different case. The Ministers' case raised two questions that had escaped the attention of the RPA. The Land Court answered both of them convincingly in AG's favour.
[124] Throughout the negotiations that I have narrated, AG's directors and its consultant found themselves locked in a frustrating correspondence in which, it seems, they were aiming at a constantly moving target. They conducted their side of the correspondence with unfailing courtesy and with unfailing patience; only to be visited at the last minute with the shock of the most drastic penalty that the RPA could impose. I regret to say that in my opinion the RPA emerges from this case with no credit.
[125] Of the present proceedings all that need be said in the light of the Land Court's findings is that the submissions presented to us on behalf of the Scottish Ministers were impossible to sustain.
XI DISPOSAL
[126] I propose to your Lordships that we should answer both questions in the Special Case in the negative.
| FIRST DIVISION, INNER HOUSE, COURT OF SESSION |
Lord President Lord Eassie Lord Malcolm | [2012] CSIH 92 XA77/12 OPINION OF LORD EASSIE in the Special Case by THE SCOTTISH MINISTERS Appellants; against ANGUS GROWERS LIMITED Respondent: _______________ |
For the appellants: J Wolffe QC, Cameron; Solicitor to the Scottish Ministers
For the respondent: Mure QC, Watson; Drummond Miller LLP;
7 December 2012
[127] I am grateful to your Lordship in the Chair for your Lordship's exposition of the legislative texts, the facts and circumstances of the case and the analysis of the decision of the Scottish Land Court. For the reasons advanced by your Lordship, I agree that the questions posed in the Special Case should be answered in the negative.
[128] As your Lordship records, in the proceedings in the Scottish Land Court the approach of the Scottish Ministers was to develop a basis for justifying the decision of the RPA of 16 March 2010 which was not canvassed in that letter. The decision communicated in that letter suddenly withdrawing recognition amounted to a volte face, since the previous communings with the RPA were such as to justify AG's belief that all the matters previously raised by the RPA had been, or were being, resolved to the satisfaction of the RPA. Moreover, the letter was misleading in its statement of the legal tests, with the implication that the decision taker proceeded under error. It is thus against that unsatisfactory history that the Scottish Ministers have sought to advance a different basis for the decision, namely that the contractual arrangements between AG as the producer organisation and ASF as their agent or sub-contractor were inconsistent with the second sentence of article 29 of the Commission Regulation, which reads -
"Outsourcing of an activity of a producer organisation shall mean that the producer organisation enters into a commercial arrangement with another entity, including one of its members or a subsidiary, for the provision of the activity concerned. The producer organisation shall nevertheless remain responsible for ensuring the carrying out of that activity, and overall management control and supervision of commercial arrangement for the provision of the activity."[1]
[129] It is clear from the terms of the grower's agreements between AG and its members that the former owed contractual obligations to the latter which were not substituted by the terms of the contract between AG and ASF. So the contractual responsibility of the producer organisation, AG, to provide to its members the services and benefits of membership remained, irrespective of the engagement of ASF. I did not understand that to be a matter of dispute. So in the argument before the Land Court and before us the focus largely passed to the latter part of the second sentence of Article 29, which refers to responsibility for overall management control and supervision of the commercial arrangement. Counsel for the Scottish Ministers contended that this required the inclusion in the contract between AG and ASF of some further, express contractual term enabling AG to give instructions to ASF respecting the detail of how ASF should go about the task which had been "outsourced" to it. While that came to be the principal point of his argument, counsel for the Scottish Ministers did not essay the detail of any such term.
[130] Along with your Lordship, I would question whether AG committed - or indeed could commit - any breach of article 29 of the Commission Regulation. It is clear that a producer organisation may be permitted to "outsource" any of its activities (see article 6 of the Council Regulation) and "outsourcing" is a term used also in the Commission Regulation (see, for example, article 27). As was observed by the Court of First Instance in Case T-432/07 France v Commission, outsourcing by engaging a third party is a means of performing the obligation in question and does not discharge the obligant of his obligation[2]. In my view the function of article 29 is to define the term "outsourcing", which is a commercial rather than a legal concept, in terms reflective of the legal relationship where a party subcontracts the performance of his obligations while remaining liable to the creditor or creditors in those obligations. The second sentence of article 29 appears to me to form part of the description of that legal situation and does not stipulate for any particular or discrete contractual provision for the giving of detailed instructions to the third party. As already mentioned, the agency agreement with ASF was the means whereby AG performed its obligations to its members under the individual grower's agreements; and as principal in the agency agreement, AG remained in a position to exercise overall control and supervision of the performance of the agent.
[131] However, in the event the Land Court found essentially a de facto failure by AG to exercise overall management by reason of the absence of a formal system for assessment of the performance of ASF. AG does not ask that we interfere with that finding, which the Land Court derived from article 29. But assuming that there was such a deficiency, I do not see that the deficiency then translates into a failure to observe the particular criteria for recognition specified in article 25 of the Commission Regulation. There is no basis in the findings of the Land Court for thinking that the absence of some formal arrangement for assessment of the quality of the performance provided by ASF resulted in AG not having at its disposal, through the agency of ASF, all that was necessary to ensure the essential functioning of the producer organisation in the respects catalogued in the article. On the contrary, ASF was a very successful agent for the organisation; and plainly its members were well able to voice concerns as to the quality of the performance of ASF, should such concerns have existed.
[132] Accordingly, in so far as there is criticism of AG in its omission to put in place some formal arrangement for assessment of the quality of its agent's performance - which would not in the event have produced a negative result - I do not consider that such an omission results in a failure to respect the criteria in article 25. I therefore consider that the premise in this case upon which counsel for the Scottish Ministers sought to argue that any omission to respect the criteria in article 25 required withdrawal of recognition is unsound. Moreover, my view of the text of article 116 is that the provisions of the opening sentence of paragraph 1, requiring a failure to be substantial and to have resulted from deliberate act or serious negligence before recognition is withdrawn, are over-arching. It is difficult to think that the Community legislator should have thought that any temporary, insubstantial failure, arising without any degree of fault, respecting the articles mentioned in the second alinéa of article 116(1) must result in the obligatory withdrawal of recognition of the status of a producer organisation. To my mind, such an interpretation would run counter to the socio-economic aims of the régime.
[133] But the question before the Land Court, on its finding of some inconsistency with article 29 in the respects to which I have referred, was whether the failure or omission thus identified was (a) substantial and (b) in that event , the result of serious negligence. In my view, the Land Court was well entitled to find, on the material before it, that any failure on the part of AG was not substantial. The evidence, which the Land Court accepted, was to the effect that ASF was a very competent performer and that if the members had any concerns, they would have had no difficulty in making those concerns known. The conclusion which the Land Court reached was that a formal system of appraisal would not have led to any significant changes. In those circumstances the further conclusion that any failure was not substantial appears to me to be not only one which the Land Court was entitled to reach but also one which it could hardly avoid. It is also an answer to the appeal. While it is thus not strictly necessary to consider the second branch, it appears to me that, given the technical nature of the omission and the absence of any practical consequences flowing from it, it is difficult to see how that omission could be said to involve serious negligence. In my view the Land Court was entitled to reach the view that AG was not guilty of any serious negligence. These were essentially matters of fact for the Land Court and for the reasons given by your Lordship there is no basis upon which this Court could, or should, interfere.
[134] Your Lordship raises the issue whether, as a court of final instance, we must request the Court of Justice of the European Union to give a preliminary ruling. Such a ruling requires to be one on a question of the interpretation or validity of a provision of European Union law. Neither of the parties in their written or oral submissions suggested that there was any question of interpretation which required to be referred or invited us to make a reference. While it would be open to us to make a reference ex proprio motu, I share the view of your Lordship that it is not necessary to request a preliminary ruling. As matters were presented to us, the focus was ultimately on the issues of whether in the circumstances of this case the perceived breach of the Commission Regulation was substantial and involved serious negligence. These are essentially matters of fact. An interpretation of the legislation is thus not necessary for the determination of the appeal.
| FIRST DIVISION, INNER HOUSE, COURT OF SESSION |
Lord President Lord Eassie Lord Malcolm | [2012] CSIH 92 XA77/12 OPINION OF LORD MALCOLM in the Special Case by THE SCOTTISH MINISTERS Appellants; against ANGUS GROWERS LIMITED Respondent: _______________ |
For the appellants: J Wolffe QC, Cameron; Solicitor to the Scottish Ministers
For the respondent: Mure QC, Watson; Drummond Miller LLP
7 December 2012
[135] I have had the advantage of reading drafts of the opinions prepared by your Lordships. I agree with both of them, and with the proposed disposal of this Special Case. I particularly wish to associate myself with your Lordships' comments concerning the conduct of the Rural Payments Agency.