SCHOOL AND NURSERY MILK ALLIANCE LTD FOR JUDICIAL REVIEW

Factual and Procedural Background

The petitioner, a membership organisation representing the dairy, health, and education sectors, challenged the funding rates set by the Scottish Ministers under the Milk and Healthy Snack Scheme (Scotland) Regulations 2021 and related guidance. The new scheme replaced a previous reimbursement-based Nursery Milk Scheme with a system where local authorities make advance payments to childcare settings based on a Local Serving Rate (LSR) set by the Scottish Ministers for each local authority area. The petitioner contended that this change led to funding cuts impacting its members' ability to compete in the market and sought judicial review on grounds including failures in consultation, improper inquiry, and irrationality in setting the LSRs.

The hearing involved submissions from senior counsel for both parties and affidavits from representatives of milk suppliers and settings, describing the impact of the new scheme. Expert economic evidence on the methodology for calculating LSRs and the scheme's competitive impact was also considered. The court examined the legislative framework, statutory guidance, and an agreement between the Scottish Government and COSLA concerning the scheme's funding.

Legal Issues Presented

1. Whether the consultation exercise conducted by the Scottish Ministers regarding the adoption of the Local Serving Rates (LSRs) was proper and fair.
2. Whether the fixing of the LSRs was irrational due to failure to make proper inquiry and taking into account irrelevant or insufficient considerations.
3. Whether the Amendment Regulations adopting the LSRs in law were lawful, given the challenges to consultation and irrationality.

Arguments of the Parties

Petitioner's Arguments

• The petitioner was not properly consulted on the proposal to base payments on LSRs or on the rates themselves until it was too late for meaningful input, depriving it of an opportunity to respond intelligently.
• The petitioner had a legitimate expectation, based on prior correspondence and consultation documents, that it would be consulted on the scheme's delivery, including funding mechanisms.
• The respondent failed to make proper inquiries into relevant factors such as the cost of non-dairy alternatives, market prices across all settings, and indirect costs related to milk provision.
• The methodology for setting LSRs was irrational, relying solely on Scotland Excel data for local authorities, excluding private settings’ higher costs without rational justification.
• The 20% uplift applied to earlier data was arbitrary and inconsistently explained, and no uplift was applied to the Scotland Excel data despite its reliance.
• The scheme failed to account for the higher costs of non-dairy alternatives, which can be significantly more expensive than cow’s milk.
• The Business and Regulatory Impact Assessment (BRIA) incorrectly asserted there would be no impact on competition without sufficient empirical basis.
• The refusal to amend the scheme despite known anomalies and adverse impacts is itself irrational.

Respondent's Arguments

• The consultation on the scheme's broad principles, including funding by local authorities, was sufficient; no further consultation on LSRs was required.
• The LSRs were a method to determine payments, not the basis of the scheme, and the petitioner had no legitimate expectation to be consulted on funding calculations.
• The decision to pay by LSRs and the method of calculation were political judgments within the respondent's margin of appreciation and not subject to judicial interference.
• The respondent considered multiple methods and chose the Scotland Excel data as it produced a higher figure than the earlier data with uplift, justifying its approach.
• Indirect costs were either included in data or irrelevant since the benefit was the milk itself.
• The BRIA showed consideration of alternatives and could not be said to be plainly wrong; the impact on competition would only be clear with hindsight.
• The scheme's rigidity and lack of adjustment mechanisms are acknowledged but do not render it irrational; anomalies would be addressed in future reviews.

Table of Precedents Cited

Court's Reasoning and Analysis

The court first considered the duty to consult and fairness of the consultation process. It applied established principles requiring consultation at a formative stage with sufficient information to allow intelligent responses. The court found that the petitioner was not informed of the crucial proposal to base payments on LSRs or the rates themselves until too late to respond meaningfully. This failure was compounded by misleading assurances that funding would not change and that existing supplier relationships would be maintained. The consultation was limited to COSLA and local authorities, excluding the petitioner and other stakeholders directly affected by the funding methodology. The court concluded that this amounted to unfair consultation and breached legitimate expectations created by prior correspondence and consultation documents.

On the irrationality challenge, the court examined the respondent’s methodology for setting the LSRs. The respondent considered three methods, ultimately adopting Scotland Excel data weighted by rurality without applying the 20% uplift used in earlier data. The court found the respondent’s explanations for the 20% uplift inconsistent and the failure to apply any uplift to the adopted data illogical and irrational. The respondent made no inquiry into the cost or proportion of children requiring non-dairy alternatives, despite the scheme’s inclusion of these benefits, resulting in a manifest error.

The court further held that basing the LSR solely on Scotland Excel data, excluding private settings’ higher costs without rational justification, was irrational and a manifest error. The respondent’s narrow interpretation of the benefit as only the milk itself, excluding related costs such as storage and serving equipment, was too restrictive and legally erroneous. The BRIA’s categorical assertion of no impact on competition was unsupported by sufficient inquiry and was a material error of fact.

Regarding refusal to amend the scheme despite known anomalies and adverse impacts, the court found that regulation 10 did not provide a mechanism for individual settings to be paid above the LSR to meet actual costs. The absence of flexibility and the respondent’s decision to postpone review until the second year was irrational given the scheme’s failure to meet its policy aims in practice.

Finally, the court noted that the challenge to the Amendment Regulations, which enshrined the LSR methodology in law, stood or fell with the broader challenges and that the irrationality grounds applied with even greater force to them.

Holding and Implications

The court held that the new Milk and Healthy Snack Scheme (Scotland) Regulations 2021 and associated guidance are unlawful on two grounds: (a) the consultation process regarding the Local Serving Rates was unfair and procedurally improper; and (b) the fixing of the Local Serving Rates was irrational due to failure to make proper inquiry and reliance on flawed methodology.

The petitioner's challenge succeeds.

As a consequence, the court will put the case out by order to consider appropriate remedies. The decision directly affects the parties by requiring reconsideration or amendment of the scheme’s funding arrangements but does not establish new legal precedent beyond applying established principles of consultation fairness and irrationality review to the facts of this case.