How to divine statutory purpose: the Israel/arms trade disinvestment case

29 April 2020 by David Hart KC

R (o.t.a. Palestine Solidarity Campaign Ltd and Jacqueline Lewis) v. Secretary of State for Communities and Local Government [2020] UKSC 16- read judgment

As I said in my post on the 1st instance decision, many people like to have a say over the investment policies of their pension funds. They may not want investment in fossil fuels, companies with questionable working practices, arms manufacturers, Israel or indeed any company which supports Israel’s occupation of the West Bank and Gaza Strip – to choose but a few of people’s current choices. And pension funds, left to their own devices, may wish to adopt one or more of these choices to reflect their pensioners’ views. But can they under current local authority pensions law?

This case is about Government “Guidance” aimed at local authorities, banning some of those “ethical” objections to investment policies but allowing other objections. “Guidance” in quotes because the net effect of the Act and secondary legislation was to make the Guidance mandatory: see [10] of Lord Wilson’s judgment. In particular, the policy ban was to apply to (a) boycotts to foreign nations and (b) UK defence industries. The sharp focus of the former was Israel. No surprises that the Quakers and the Campaign against the Arms Trade should appear in support of the challenge to the latter.

The Guidance is applicable to local government pensions affecting 5 million current or former employees. So it arose on that ceaseless battleground of government’s direction/intermeddling in local government affairs: was it or was it not authorised by the underlying legislation?

The Guidance said that those running local authority pensions must not use their policies to

pursue boycotts, divestment and sanctions…against foreign nations and UK defence industries…other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government;

or

“pursue policies that are contrary to UK foreign policy or UK defence policy”.

Did these prohibitions go beyond the SoS’s powers under the relevant pension provisions?

Answer, according to the Supreme Court, yes, but by a majority of 3-2.

There is a statutory regime applicable to local authority pensions. The Public Service Pensions Act 2013 sets the scene. But you get granular when you descend to the  Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016.  Reg. 7(1) tells authorities that they must formulate an investment strategy which is in accordance with guidance from the SoS. The strategy (reg. 7(2)) must contain things like a requirement to invest funds widely, the fund’s approach to risk, and

(e) The authority’s policy on how social, environmental and corporate governance considerations are taken into account in the selection, non-selection, retention and realisation of investments.

So the authority must articulate in its strategy what it will or will not invest in, so that all involved know where they stand.

The Claimants’ central argument was the prohibitions on boycotts etc fell outside the SoS’s statutory powers because they were issued not for pensions purposes, but for foreign affairs and defence purposes. This is a very familiar public law ground of challenge, associated with the Padfield [1968] AC 997 decision.

The question involves an examination of the policies found in the statutory regime to see whether the particular exercise of power (the ban on such bans) fell within it. As Lord Wilson put it at [1], “From the words in their context Parliament’s purpose in conferring the power can be identified; and purpose will illumine its scope”.

Neat legal formulation, but in practice, yes and no, given that this SC disagreed as to the extent of that scope.

The authorities were specifically told by reg.7(2) (backed up by the Guidance) that they should devise a policy on social, environmental and corporate governance considerations, but then the Guidance tells them what they must not say in that policy.

The SoS says that this exposed a conflict in the claim. If the SoS can make rules about these wider investment considerations, why can’t he ban specific ones that may affect his other policies. Read in this way, all such directions and bans are capable of being made for “pension purposes.”

But the SoS’s evidence made it clear that the controversial bits of the guidance were a reflection of broader political considerations, including a desire to advance UK foreign and defence policy, to protect UK “defence” industries and to ensure community cohesion. The SoS argued that such foreign/defence affairs purposes are pension purposes – just as non-financial purposes, not connected with prudential management, can be pension purposes.

The Supreme Court, as did the judge, disagreed. A unanimous CA went the other way. Net effect: 4 judges went with the effect of the majority judgment, whereas 5 disagreed. So these statutory purposes are rather more elusive than they may seem.

The nub of Lord Wilson’s judgment (approved by Lady Hale and generally agreed with by Lord Carnwath) is to be found at two passages in an admirably concise judgment. And the challenge succeeded on this ground.

In the two passages under challenge, however, the Secretary of State has insinuated into the guidance something entirely different. It is an attempt to enforce the government’s foreign and defence policies; and it purports to provide that, even when the tests commended by the Law Commission for reaching a potential investment decision by reference to non-financial considerations have both been met, an administrator is prohibited from taking the decision if it runs counter to such policies. [27]

Irrespective of whether the misconception to which I have referred played a part in leading the Secretary of State to include in the guidance the two passages under challenge, I conclude that his inclusion of them went beyond his powers. HOW does not include WHAT. Power to direct HOW administrators should approach the making of investment decisions by reference to non-financial considerations does not include power to direct (in this case for entirely extraneous reasons) WHAT investments they should not make. [31]

The dissent came from Lady Arden and Lord Sales. They concluded that the purpose of the underlying Act was not simply to set up public service pension schemes but to ensure that the public interest was reflected in their management. As you can see, by that route, the public interest, as defined by central government, could be imposed on the public interest as perceived by the pension trustees and their beneficiaries. Put the other way, the pursuit of boycotts against foreign states was considered to be beyond the competence of local authorities: [55].

On the legal approach, they noted at [65] that a statute may well have more than one statutory objective. Once the drafter started drafting, they may well think that the mischief in pre-drafting reports and papers may require also the resolution of “concomitant mischiefs…as a necessary corollary”.

Conclusion

Whatever your instinctive view about this (is it the business of local authorities to ‘dictate” foreign policy choices, or is the business of central government to dictate pension choices?), I could not help be struck by the rather approximate way we currently go about statutory construction. We start with the ordinary meaning of the words, in context. Ah, now what is that context? In this case, it included a 2014 Law Commission Report, a consultation in 2015 for what was to become the 2016 Regulations, a 2016 Public Procurement Policy Note, and the SoS’s consultation response preceding the 2016 Regulations made on 1 November 2016. The rival positions, and rival judges, combed through this lot for snippets which supported the narrower or wider view of the SoS’s powers.

Can we do things better than this? As the minority observed at [64], it is not parliamentary practice to insert purpose clauses into legislation. “Purpose” may be deduced from the context, including the constitutional position, as the minority saw it in this, including the role of central government for the conduct of international affairs (I would agree, but that begs the pension question), and “for promoting the country’s economy” (by which they, relevantly, mean the arms trade – why, democratically, is the economy or the arms trade solely a matter for central government?).

A nostalgic proposal in 2020, but one forward-looking as well. EU Directives have recitals. Well drafted, they can tell you exactly what the measure is about. They can also be useless if they go on for many pages, suppressing the ambiguities in verbiage. But a home-grown version of this (changing current practice, as the minority correctly point out) might be a better way of identifying statutory purpose than the reading of the runes that all the judges had to do here, leading to starkly differing conclusions.

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