Bank Mellat v HM Treasury

Summary

Recognised by The Lawyer as one of the top 10 cases of 2013, Bank Mellat v HM Treasury is a landmark sanctions challenge in which Zaiwalla & Co successfully overturned the UK Treasury’s listing of Bank Mellat under the UK’s Iran sanctions regime. Because the proceedings engaged national security material, the litigation also involved the first closed hearing in the Supreme Court’s history, and it remains a leading authority on how English courts approach cases where part of the evidential picture must be heard behind closed doors.

Alongside the UK proceedings, we also led Bank Mellat’s successful challenge to European Union sanctions, resulting in the European Court of Justice declaring the measures unlawful.

Factual background

In October 2009, HM Treasury imposed financial restrictions on Bank Mellat under the Counter-Terrorism Act 2008, giving effect to the direction through the Financial Restrictions (Iran) Order 2009. The order effectively required financial sector participants in the UK to cease commercial dealings with Bank Mellat, with the practical effect of shutting down its UK operations and disrupting its access to UK financial markets.

The statutory framework included safeguards, including parliamentary approval and a right for an affected party to apply to the High Court to set the restrictions aside through a dedicated procedure for “financial restrictions proceedings”.

Proceedings in the High Court and Court of Appeal

Bank Mellat challenged the order in the High Court. Because HM Treasury relied on material said to be too sensitive to disclose openly, the High Court hearing proceeded partly in open court and partly under a closed material procedure, with special advocates appointed to test the closed case.

The High Court dismissed the challenge. The Court of Appeal also dismissed the appeal. The litigation then proceeded to the Supreme Court, where the case was determined through two judgments delivered on the same day:

Bank Mellat v HM Treasury (No 1) [2013] UKSC 38
Bank Mellat v HM Treasury (No 2) [2013] UKSC 39

Supreme Court judgment No 1

Closed material procedure and the first closed hearing in Supreme Court history

The first Supreme Court judgment addressed whether the Supreme Court could, as a matter of power and principle, determine an appeal using a closed material procedure, and whether it should do so in Bank Mellat’s appeal.

The court recognised directly the tension between open justice, natural justice, and the requirements of national security. The majority held:

it was possible in principle for the Supreme Court to adopt a closed material procedure on an appeal; and
it was appropriate to do so in this appeal.

A key feature of the Supreme Court’s handling was its insistence that a closed hearing must remain exceptional. The court emphasised that closed material procedures are not a convenience, and should only be used where genuinely necessary. The experience of the closed session in this case also served as a practical warning: having proceeded with a closed hearing, the Supreme Court concluded that the closed material ultimately made no difference to its reasoning on the substantive appeal.

Supreme Court judgment No 2

The sanctions challenge succeeds and the order is quashed

In the second judgment, the Supreme Court allowed Bank Mellat’s appeal and quashed the Financial Restrictions (Iran) Order 2009. The decision is important both for its outcome and for the analytical approach applied by the court.

The Supreme Court addressed the challenge on both procedural and substantive grounds.

1) Substantive grounds
At the centre of the case was whether the interference with the Bank’s access to UK financial markets bore a rational and proportionate relationship to the statutory objective.

The Supreme Court examined the justification advanced for selecting Bank Mellat, the coherence of the reasoning supporting the restrictions, and whether a measure of this breadth could properly be justified. A central criticism was the singling out of Bank Mellat and the difficulty of demonstrating why the restrictions, in the form imposed, were a justified response to the risk relied upon.

The judgment is also closely associated with the Supreme Court’s rigorous treatment of proportionality in public law, including the requirement to examine rational connection, necessity and overall balance when the state adopts measures that interfere with rights and commercial activity.

2) Procedural grounds
The Supreme Court also held, by a majority, that the Bank should succeed on procedural fairness. The case concerned whether the Treasury was required to give the Bank an opportunity to make representations before imposing restrictions of this character, and whether the procedure adopted met the standards required by common law fairness in this context.

Outcome
The Supreme Court’s decision resulted in the order being set aside and the restrictions quashed. The judgments together established a lasting framework for handling national security material at the highest appellate level, while also demonstrating that measures justified by reference to national security and foreign policy remain subject to disciplined judicial scrutiny.

European Union sanctions challenge

In parallel to the UK proceedings, we led Bank Mellat’s successful challenge to EU sanctions, with the European Court of Justice holding that the restrictive measures imposed against the Bank were unlawful. That outcome forms part of the same wider history: a sustained challenge to measures imposed at both UK and EU level, and the legal standards applied to justifications advanced for such restrictions.

Significance

For practitioners, Bank Mellat remains a central reference point in at least three respects:

Closed proceedings and national security material: the case remains foundational in the Supreme Court’s approach to closed hearings and the safeguards expected when a party cannot see all of the material relied upon.
Scrutiny of sanctions and restrictive measures: the judgments confirm that even where foreign policy and national security are engaged, the courts will examine rational connection, justification and proportionality with care.
Procedural fairness: the Supreme Court’s decision underlines that fairness requirements can apply with real force where executive action has immediate and severe commercial consequences.