High Court refuses permission for climate change judicial review against the FCA for a second time

The High Court has refused environmental NGO ClientEarth’s application for permission for judicial review of the decision taken by the Financial Conduct Authority (FCA) to approve the prospectus of an oil and gas operator Ithaca Energy plc (Ithaca): R (on the application of ClientEarth) v Financial Conduct Authority [2023] EWHC 3301 (Admin).

Under s.87A of the Financial Services and Markets Act 2000 (FSMA), the FCA may not approve a prospectus unless satisfied that it contains the information required by the Prospectus Regulation (EU) 2017/1129 (Prospectus Regulation).

Although the claim itself was brought against the FCA, ClientEarth’s press release upon filing the case focused on Ithaca and its interests in the Cambo and Rosebank oil and gas fields in the North Sea.

Key Points

  • The court reiterated well established principles of judicial review in making it clear that it will afford regulators broad discretion when exercising their expert judgment, regardless of the climate change context.
  • It will refuse to substitute its own views (or those of other interested parties) for those of the regulator.
  • Instead, the court will only intervene where the regulator has misdirected itself on the law, failed to take relevant considerations into account, or made an irrational decision which is a “high hurdle” to overcome.

Background

In 2022, Ithaca floated on the London Stock Exchange in the biggest public listing of the year. As part of that process Ithaca submitted a prospectus for approval by the FCA. Following the FCA’s approval and publication of Ithaca’s Registration Document in mid-October 2022, ClientEarth twice wrote to the FCA alleging deficiencies in the document’s treatment of climate-related financial risks. Notwithstanding this, Ithaca received FCA approval for its final prospectus and published the document on 9 November 2022.

ClientEarth subsequently sought permission for judicial review of the FCA’s decision alleging that the FCA’s approval of Ithaca’s prospectus for the listing was unlawful on the basis that: (a) the FCA erred in law by approving Ithaca’s prospectus where it failed to disclose or adequately describe Ithaca’s assessment of the materiality and specificity of its climate-related financial risks in breach of Article 16(1) of the Prospectus Regulation; and (b) the FCA’s conclusion that Ithaca’s prospectus contained the necessary information which is material to an investor for making an informed assessment of Ithaca’s financial position and prospects, as required by Article 6 of the Prospectus Regulation, was rationally unsustainable.

On its initial review of the papers, the court found in favour of the FCA and refused ClientEarth’s application for permission to apply for judicial review, following which ClientEarth exercised its right under CPR 54.12 to ask the court to reconsider its decision at an oral hearing.

Permission Decision

The court held that all the grounds put forward were unarguable and had no realistic prospect of success.

ClientEarth’s arguments

At the oral hearing, ClientEarth submitted that the FCA:

  • misinterpreted Article 16 of the Prospectus Regulation and the European Securities and Markets Authority (ESMA) Guidelines on risk factors under the Prospectus Regulation in two respects. Firstly, by assuming that Article 16(1) of the Prospectus Regulation is satisfied by an issuer identifying material risk factors for inclusion in a prospectus, rather than including an assessment of materiality in the prospectus itself. Secondly, by mistakenly considering it is for the FCA to be satisfied under s.87A FSMA that a prospectus complies with Article 16(1) of the Prospectus Regulation, and that its decisions can only be challenged on public law grounds. Instead, the claimant argued that the question is whether an issuer has complied with its obligation to disclose its assessment of the materiality of a risk factor, and that is a hard-edged question of law for the court, not a matter of discretion or rationality. Similar arguments were made in relation to specificity of climate related risks, where ClientEarth alleged that the prospectus did not shed sufficient light on Ithaca’s particular situation as opposed to identifying possible climate related risks in the industry generally.
  • acted irrationally in concluding the prospectus contained the necessary information material to an investor seeking to make an informed assessment of Ithaca’s financial position and prospects and so met the requirements of Article 6 of the Prospectus Regulation. Ithaca was said to be in a comparable position to the companies referred to in the FCA’s technical note TN801.2 (which states “many companies are likely to need to consider significant changes to their business” to achieve the goals of the Paris Agreement and the UK government’s Net Zero Strategy). However, the prospectus did not adequately deal with the potential impacts of the Paris Agreement, were it to be fully implemented.

Error of Law

The court noted that Parliament has conferred upon the FCA responsibility for approving a prospectus. s.87A FSMA provides that the FCA may not approve a prospectus unless it is satisfied that the prospectus contains the information required by the Prospectus Regulation and all the other requirements imposed by the relevant provisions of FSMA. The FCA’s decision to approve Ithaca’s prospectus could therefore only be challenged on public law grounds (i.e. that it has misdirected itself on the meaning of the law it has to apply, failed to take relevant considerations into account, or made an irrational decision).

The court accepted the FCA’s submissions that the requirements of Article 16(1) of the Prospectus Regulation are not hard-edged, and whether they have been met involves an evaluative judgment. In such a case, the court said that it may not substitute its own view if the FCA has made a rational assessment (as per R (Yukos Oil) v Financial Services Authority [2006] EWHC 2044 (Admin)).

In Lang J’s view, the FCA’s interpretation of Article 16(1) of the Prospectus Regulation was plainly correct on a natural reading. The court noted that Article 16 of the Prospectus Regulation and the ESMA Guidelines (a) require only the disclosure of material risk factors, and (b) limit the risk factors identified to those specific to the issuer, which must be adequately described. There is no separate requirement to disclose an assessment of the materiality or specificity of risk factors, nor for a particular form of quantitative or qualitative analysis.

The court distinguished R (Friends of the Earth) v SSBEIS [2022] EWHC 1841 (Admin) (see our previous blog post here), in which the Secretary of State’s setting of the UK government’s Net Zero Strategy was successfully challenged in circumstances where the court found that insufficient information was provided to the relevant Secretary of State in order to fulfil the obligations imposed by the Climate Change Act 2008, on the basis that here there was an expert regulator required to make an exercise of judgment as to whether certain legal requirements were met. The court concluded that there was no arguable error of law in the approach taken by the FCA or its conclusion that Ithaca had adequately described the relevant risk factors in circumstances where the prospectus “plainly did” address climate related risks.

Rationality

The court noted that the Paris Agreement was identified as a material risk to Ithaca in its prospectus (alongside other climate-related factors), and that the FCA was satisfied that the prospectus complied with Article 6 of the Prospectus Regulation. Though ClientEarth disagreed with this assessment and presented competing arguments as to compatibility with the Paris Agreement, it did not come close to demonstrating that the FCA had acted irrationally, which was a high hurdle to overcome. This ground was also dismissed as unarguable with no realistic prospect of success.

Accordingly, the court found in favour of the FCA and refused ClientEarth’s application for permission to apply for judicial review.

Aarhus Convention

The court also considered whether the claim was an Aarhus Convention claim, for which a fixed costs regime applies limiting the costs recoverable between the parties.

The court noted that an Aarhus Convention claim is defined as including a claim brought by a member of the public for judicial review of a decision taken by a body exercising public functions which is within the scope of Article 9(3) of the Aarhus Convention. Article 9(3) includes challenges to public authorities contravening provisions of national law relating to the environment.

The court accepted that ClientEarth was a member of the public for the purposes of the Aarhus Convention, but found that neither s.87A FSMA nor the Prospectus Regulation form part of the UK’s environmental law as their purpose is not to protect or otherwise regulate the environment (notwithstanding that the risk disclosures required by these provisions might incidentally relate to the environment). Any connection with environment and the purpose of the Aarhus Convention was said to be incidental and remote.

The court therefore concluded that the claim was not an Aarhus Convention claim.

Comment

This was an innovative attempt by an environmental NGO to use an existing statutory and regulatory regime to introduce heightened climate change considerations. However, the court made it clear that it was not part of the FCA’s function to evaluate the extent to which a prospectus may or may not promote climate change mitigation or net-zero targets. The court respected the discretion and decision making of the FCA as an expert regulator and limited itself to applying established public law principles despite the broader context of the climate crisis.

Although unsuccessful, the challenge highlights the increased scrutiny on climate issues and growing pressure on a wider range of regulators and public authorities who are not traditionally seen as operating in the environmental sphere.

It is also notable that the court was not prepared to classify the claim as environmental for the purposes of allowing costs protection for the claimant, which may serve to discourage other such speculative claims.

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Andrew Lidbetter
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Nusrat Zar
Nusrat Zar
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Jasveer Randhawa
Jasveer Randhawa
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Nihar Lovell
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Sarah Hawes
Sarah Hawes
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Tom Wyer
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When can a public authority withdraw its own decision?

In R. (on the application of Piffs Elm Ltd) v Commission for Local Administration in England [2023] EWCA Civ 486, the Court of Appeal considered the withdrawal of a decision by the Local Government Ombudsman (the “Ombudsman“), and in doing so, provided useful commentary regarding the limits of a public authority’s implied powers.

Key Points

  • When a rule-making power is conferred by Parliament, then, absent a contrary intention, Parliament also impliedly confers a power to rescind or revoke the rule.
  • However, if Parliament confers a function on a body or on an office holder, the provision conferring that power does not impliedly confer a power to rescind or revoke an earlier exercise of that function, even if the earlier exercise was legally flawed.
  • In such cases the proper remedy is judicial review.

Background

The dispute arose in the context of the claimant developer’s three failed applications for planning permission to Tewkesbury Council (the “Council“). The refusal of the second planning application was judicially reviewed, and the court found that there was an appearance of bias. The Council stated that they would address the appearance of bias but noted that Piffs Elm would not receive a refund for the fee associated with any further planning applications. Nonetheless, Piffs Elm proceeded to make a third application which the Council refused to determine, and it did not refund the application fee (the “Fee“). Piffs Elm subsequently made a complaint of maladministration to the Ombudsman.

The current proceedings involved a challenge to the following three decisions which stemmed from the events above:

  • the final report issued by the Ombudsman on 22 August 2019 (“D1“);
  • the Ombudsman’s decision on 14 November 2019 to withdraw D1 (“D2“); and
  • the final report issued by the Ombudsman on 3 February 2021 (“D3“).

In D1, the Ombudsman found fault with the Council because it did not consider exercising its discretion to refund the Fee. After taking legal advice, the Ombudsman concluded in D2 that D1 was legally flawed, and decided that he would re-open the investigation, withdraw D1 and issue a new report. The Ombudsman then issued D3, which concluded that the Council had not acted with fault as it was not clear whether the Council in fact had a discretion to refund the Fee. The High Court rejected Piffs Elm’s application for judicial review of the Ombudsman’s decisions, dismissing the argument that the Ombudsman had no power to withdraw D1 and the challenge to D3.

Judgment

The issues on appeal were whether:

  • the Ombudsman had the power to withdraw D1 (“Issue 1“);
  • if not, whether D1 was unlawful (“Issue 2“); and
  • if so, whether D3 was unlawful (“Issue 3“).

Issue 1

As it was accepted that there was no express power to withdraw D1, the main question was whether the Ombudsman had an implied power to withdraw D1. Laing LJ held that the correct approach was to ask whether the implication was necessary rather than convenient. The Court of Appeal found that it was not necessary to imply a power to withdraw the report in the context of this particular statutory scheme which contained a complete code. The court noted that the Ombudsman had many opportunities to consider arguments and information, including whether his investigation was complete, before reaching his decision. Consequently, it would have been unfair to the ‘winning’ party to have their decision swapped for a less favourable one, especially since there would be no time limit on the exercise of such an implied power.

The court considered that the only source of an implied power to withdraw a report would be contained in sections 12 and 14 of the Interpretation Act 1978, which deal with the continuity of powers and the implied power of statutory bodies and office holders. Sections 12 and 14 of the 1978 Act were said by Laing LJ to be an exhaustive statement of the circumstances in which Parliament has conferred an implied power to revoke an earlier exercise of a function. The provisions are clear that when a rule-making power is conferred, then, absent a contrary intention, Parliament also, by implication, confers a power to rescind or revoke the rule. However, since section 12 says nothing about revocation, it is also clear that if Parliament confers a function on a body or on an office holder, the provision conferring that power does not confer, by implication, on that body or office holder a power to rescind or revoke an earlier exercise of that function. The court noted that the ramifications of conferring an implied power via section 12 could not be limited to the specific scenario in question, as section 12 does not explain the context in which a power could be implied or the limits of any such power. Therefore, the court concluded that section 12 did not confer an implied power to revoke D1 and the parties should have sought judicial review of the legally flawed decision. To allow the Ombudsman to withdraw simply because he believes that his decision was unlawful would deprive the parties of the opportunity to go to court and have the matter decided by an independent arbiter, and of the procedural protections which apply on an application for judicial review.

Issue 2

As the Ombudsman had no power to withdraw D1, the court considered whether D1 was unlawful, concluding that the Ombudsman did not have jurisdiction to decide whether the Council had discretion to refund the Fee, as this was a question of law that should have been decided by the court.

Issue 3

The court held that the Ombudsman was correct to conclude that he had no jurisdiction to consider Piffs Elm’s complaint in relation to the Fee, which essentially raised two legal questions rather than being a complaint about an administrative act.

In summary, the court held that D1 was unlawful, D2 was unlawful because the Ombudsman had no power to withdraw D1, but D3 was lawful because the Ombudsman had no jurisdiction to consider questions of law. Therefore, Piffs Elm’s appeal was dismissed, despite successfully arguing that D2 was unlawful.

Comment

Although this case focuses on the lawfulness of the Ombudsman’s decisions and the scope of his powers, it also provides useful guidance for public authorities when publishing reports or final decisions. Public authorities should carefully consider all information and arguments before them in advance of publishing any decision, as the power to revoke a report will not easily be implied in the absence of an express power.

Andrew Lidbetter
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Court of Appeal advocates a practical approach for regulators faced with non-compliant legal systems

In R. (on the application of SSE Generation Ltd) v Gas and Electricity Markets Authority (GEMA) [2022] EWCA Civ 1472, the Court of Appeal allowed the appeal and cross appeal brought by the Gas and Electricity Markets Authority (“GEMA“), and SSE Generation Limited (“SSE“), respectively, in the context of amendments made to an energy code.

Key Points

  • A regulator seeking to bring a non-compliant legal system into compliance with the law may have an element of discretion as to managing that transition, such that brief periods of non-compliance may be permitted by the courts.
  • If there is a conflict between a private law contract, such as the Connection and Use of System Code (“the Code“), and the statutory duties of a relevant regulator, the latter will prevail. A public law decision maker cannot prevent itself from complying with its statutory duties by entering into, or approving, an inconsistent contract.
  • Despite having power to rectify errors in legislation, the court will not repair such errors if there is a complex and uncertain regulatory environment where the legislative intent cannot be certain and will be wary of straying into judicial legislation.

Background

The appeals concerned GEMA’s decision on a modification to the methodology for setting transmission charges payable to network operators by electricity generators using the network in Great Britain (“the GEMA Decision“). In the GEMA Decision, the modification of the Code: (i) required a methodology to be adopted for the setting of charges which was not compliant with the relevant law but which was intended to constitute an interim position pending a fresh decision which would be legally compliant; and (ii) adopted a definition of the expression “congestion management” which meant that the costs attributable to the management of “congestion” on the transmission system within Great Britain were not taken into account when calculating limits on the transmission charges which could be levied.

Following the GEMA Decision, one affected electricity generator, SSE, brought a statutory appeal to the Competition and Markets Authority (“CMA“) which upheld the GEMA Decision. Consequently, SSE sought judicial review of the CMA’s decision. The High Court held that it was unlawful for the CMA to approve the GEMA Decision endorsing the imposition of unlawful charges, even as an interim measure. However, it upheld the CMA and GEMA’s decision that the only congestion management costs falling outside the exclusion for ancillary services were those relating to the management of congestion on interconnectors between EU member states (see our blog post on this case here).

There were therefore two appeals against the High Court’s judgment:

  1. The first appeal was brought by GEMA in relation to its power to adopt interim “stop gap” measures, which include non-legally compliant components in respect of a modification to the Code (“Issue I“).
  2. The second cross appeal was brought by SSE concerning the meaning of “congestion management” costs (“Issue II“).

Judgment

The Court of Appeal (Green LJ giving the leading judgment) allowed both the appeal by GEMA on Issue I and the cross appeal by SSE on Issue II.

Issue I

Issue I concerned the powers and duties of a regulator when confronted with a system which is not compliant with the law but where the regulator then seeks to bring the system into compliance, which may be a complex exercise that cannot be done immediately.

There is a statutory duty on GEMA to both comply with the law and ensure compliance by its regulated community. The existence of a duty does not, however, preclude the decision maker also having a discretion as to how to go about ensuring compliance; the two are not mutually exclusive.  In managing that transition from non-compliance to compliance, the court concluded that the judge erred in ruling that GEMA’s staged approach was unlawful. It was implicit in the judge’s reasoning that there was no discretion or power for GEMA to do anything more than demand immediate observance, even if this was impossible to achieve in any realistic and practical sense, and left the state of observance with the law in a worse situation. To prohibit the interim stage upon the basis that it reflects a degree of temporary (diminishing) non-observance, as the judge did, begs the question of what regulators are meant to do in a case such as the present in order to meet their statutory duty.

The court concluded that under the relevant legislation GEMA had power as to how it went about performing its duty to secure compliance with the law. This power came with a relatively broad margin of judgment or discretion in identifying a solution to turn non-compliance into compliance.

It was also important to bear in mind that the Code is a private law contract. The facts of the case suggest that the Code is capable of hindering the discharge by GEMA of its statutory duty.  However, in light of the fundamental principle of public law that a decision maker cannot prevent itself from complying with its statutory duties by entering into, or approving, an inconsistent contract, the Code cannot take precedence over the duty of GEMA to ensure timely compliance with the law. Insofar as there is a conflict between the Code and the statutory duties of GEMA, the latter will prevail.

Therefore, GEMA is not bound by the Code when it comes to taking the steps necessary to ensure compliance with the law, and, if the Code is an impediment to proper enforcement it is either inoperative and GEMA should deploy other powers at its disposal to give effect to its duty, or it needs to amend the Code, or both.

Issue II

Issue II was about the meaning of the phrase “congestion management” and whether the costs of managing certain aspects of network congestion must be taken into account in the calculation of transmission charges.

Upon the expiry of the post-Brexit implementation period, the relevant EU measure (“the 2019 Regulation“) was translated into EU retained law. Whilst purporting not to change anything, the drafter of the EU retained law, instead of using the definition of “congestion” in the 2019 Regulation, used a definition from a 2009 repealed version of that regulation (“the 2009 Regulation“) whilst also noting that this reversion was not intended to bear a meaning differing from the 2019 Regulation. There were discrepancies between the 2019 definition and 2009 definition of “congestion” which, if applied, would risk creating market distortions.

Despite detailed consideration the court found the legislative approach “baffling” in light of the general rule of legislative drafting, that a measure should not be amended unless it is intended to convey a change of meaning. The court concluded that the definition of “congestion” in the EU retained law reflected an error which lies in the assumption made that the new 2019 definition was not intended to bring about any substantive change to that in the old, repealed, 2009 Regulation. In other words, the legislature had not intended to define “congestion” in narrow terms linked to congestion on international interconnectors.

Lord Justice Green also noted that despite the court having powers to correct errors in legislation, it will always ensure, to the greatest extent possible, that the legislative intent is fulfilled and should only undertake legitimate purposive interpretation and not stray into judicial legislation. The court noted that here the task would involve seeking to replicate the exercise of a statutory power conferred upon the Minister in a complex and uncertain regulatory environment and in an area of relations between Great Britain, Northern Ireland and the EU which is currently beset with political complications. Therefore, the court concluded, with some hesitation, that it was best to leave it to the Secretary of State to make any changes that were considered necessary to achieve the stated present purpose of the measure of EU retained law.

The court also considered a procedural issue concerning the admissibility of the views of officials in London and in Brussels on the meaning of the 2019 Regulation. The court noted that the views of officials do not fall within the class of documents traditionally treated as admissible as a guide to legislative intent. Views of officials do not necessarily represent the views of responsible Ministers or the institutions that employ them and play no part in the legislative process. To take them into account would be inconsistent with the principles upon which purposive interpretation operates.

Comment

The judgment in this case, despite being concerned with a specific legislative regime in the energy sector, raises broader issues of importance across public law.

The Court of Appeal’s practical approach to the impossible situation the regulator found itself in shows that a degree of flexibility and common sense often needs to accompany the strict legal analysis. This will be welcomed by regulators.

This judgment is also notable as it shows the court’s apprehension towards using its power to correct errors in legislation when the error is related to a complex and uncertain regulatory environment. This will be particularly relevant in the case of EU retained law where, as the court itself explained, “the legislature pushed through literally thousands of complex and highly technical measures, overwhelmingly in subordinate legislation, in record time and invariably with but scant Parliamentary scrutiny of the detail, in order to meet the deadline for the end of the post-Brexit implementation period“.

Andrew Lidbetter
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Nusrat Zar
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Tribunal considers what constitutes a public authority under the Environmental Information Regulations 2004

The First-tier Tribunal (“FTT“) has overturned a decision by the Information Commissioner (the “Commissioner“) in finding that Heathrow Airport Ltd (“HAL“) is not a public authority for the purposes of the Environmental Information Regulations 2004 (the “EIR“), in Heathrow Airport Limited v Information Commissioner, EA/2020/0101.

Key Points:

  • A dual test is applied when determining whether an entity is a public authority for the purposes of regulation 2(2)(c) of the EIR, namely a body which carries out functions of public administration.
  • First, there must be a discrete legislative or executive measure by which a legal person is empowered or entrusted by the state to act on its behalf, and secondly the entity must have been vested with special powers beyond those normally applicable in private law.
  • Once the dual test has been considered, a “cross-check” is applied to consider whether the entity is in fact a functional public authority.

Background

HAL received a request for information under the EIR. HAL responded that it was not a public authority for the purposes of the EIR and so was not obliged to respond to the request.

On appeal to the Commissioner, she concluded that HAL was a public authority for the purposes of regulation 2(2)(c) of the EIR. Public authorities under regulation 2(2)(c) are “any other body or other person, that carries out functions of public administration”. The Commissioner found that there was a “direct and continuing link” between the original transfer of functions, powers and responsibilities from the British Airports Authority by way of the Airports Act 1986 (“the Act“) to the private sector and ultimately to HAL.

HAL appealed against the Commissioner’s decision to the FTT.

Judgment

The FTT held that when determining whether an entity is a public authority for the purposes of regulation 2(2)(c) of the EIR, a dual test is applied. First, there must be a discrete legislative or executive measure by which a legal person is empowered or ‘entrusted’ by the state to act on its behalf, and secondly the entity must have been vested with special powers beyond those normally applicable in private law.

In respect of the first limb of the test, the FTT concluded that the powers in the Act were of a limited nature and expressed in terms of facilitating the operation of the airport. There was not an equivalent provision to section 6 of the Water Industry Act 1991, which was considered by the Upper Tribunal in Fish Legal v Information Commissioner [2014] UKUT 52, where a group of water companies were held to be public authorities under regulation 2(2)(c).

The FTT held that HAL is not a functional public authority but a commercial enterprise operating in a market, seeking to make a profit for its shareholders in competition with other businesses of a similar nature. There was no instrument by which HAL had been made responsible by the state to act on its behalf to perform a service of public interest. Accordingly, there had not been an entrustment.

In respect of the second limb of the dual test, the FTT found that although HAL had a number of special powers in relation to the compulsory acquisition of land and the making of byelaws, this also did not amount to entrustment. The fact that the provision of airport facilities was at one time a function of the state did not attract significant weight.

The FTT noted that even if HAL had been vested with special powers for the purpose of performing public interest services, it would not consider it a public authority after applying a “cross-check” to consider whether the entity is in fact a functional public authority. The FTT considered that HAL is a commercial business operating for a profit and for the benefit of its shareholders. While Heathrow airport is a crucial part of the national infrastructure and has to comply with a complex legislative and regulatory framework, it does not follow that it is an organic part of what the state does.

Comment

The FTT’s judgment reiterates the dual test for determining what is a public authority under regulation 2(2)(c) of the EIR, derived from two previous Upper Tribunal decisions in Fish Legal and Cross v Information Commissioner [2016] UKUT 153. It provides clarity on the distinctive nature of each limb, confirming that entrustment and special powers are conceptually different. A separate finding of entrustment will need to be established if an entity is to be considered a public authority for the purposes of the EIR. This may signal the reversal of a trend in recent years of the expansion of what is a “public authority” for the purposes of the EIR.

The Information Commissioner may appeal this decision to the Upper Tribunal.

Andrew Lidbetter
Andrew Lidbetter
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Nusrat Zar
Nusrat Zar
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Jasveer Randhawa
Jasveer Randhawa
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