THE COURT

(Sheriff MacLeod, Mr J A. Smith)

NINEWELLS LIMITED v THE SCOTTISH MINISTERS

(Application RN SLC/173/10 – Order of 24 May 2011)

AGRICULTURE – RURAL PAYMENTS APPEAL – WHETHER FARMER IN NITRATE VULNERABLE ZONE ENTITLED TO MAKE ADDITIONAL APPLICATIONS OF NITROGEN BASED ON YIELD DATA FROM COMPARABLE FARMS

The appellants had an arable farm in an area designated a Nitrate Vulnerable Zone in terms of the Action Programme for Nitrate Vulnerable Zones (Scotland) Regulations 2008 (“said Regulations”). Said Regulations limit the amount of nitrogen farmers are permitted to apply to crops and compliance with the Regulations is a requirement of entitlement to Single Farm Payment. In 2008 the appellants contracted out their farming operations to a local contract farmer who also farmed other farms in the locality on a contract basis. In 2009 he applied more than the standard amount prescribed in said Regulations to the appellants’ winter oilseed rape and winter wheat crops. Such additional applications are permissible under said Regulations if the expected yield for the crop in question is over the standard yield. The fields on which these additional applications were made had not previously produced higher than standard yield of these crops. Instead the appellants’ expectation of higher yields in 2009 was based on results achieved by the contract farmer on other allegedly comparable farms in the locality under his management. On discovery of the application of these additional amounts of nitrogen during an inspection in December 2009, the respondents imposed a penalty of a five per cent deduction from the appellants’ direct support scheme payments for 2009. That was on the basis that additional amounts of nitrogen were permissible only where there was historical evidence of the particular areas to which they had been applied having produced higher than standard yields of the crop in question, evidence of such yields on allegedly comparable farms being, in their view, irrelevant. The appellants appealed.

HELD that there was nothing in Regulations 5 and 12 or in Schedule 3 of said Regulations, or in the European legislation to which said Regulations were intended to give effect, which restricted the definition of the term “expected yield” in Table 1 of Schedule 3 in the way contended for by the respondents; that all a farmer required to show was that his expectation of a higher than standard yield was reasonable and that such reasonable expectation could be based on results achieved on comparable farms subject to similar management regimes, and case allowed to proceed to an evidential hearing.

The note appended to the Court’s order is as follows:

[1] This is an appeal under Regulation 8 of the Rural Payments (Appeals) (Scotland) Regulations 2009 (“the 2009 Regulations”). It is against a finding by the respondents that the appellants committed a breach of the Action Programme for Nitrate Vulnerable Zones (Scotland) Regulations 2008 (“the NVZ Regulations”). It follows an internal review of the matter by the respondents in terms of Regulation 5 of the 2009 Regulations and references below to a review and a Review Report are to that part of the procedure.

[2] The appellants have a farm known as Spylaw Farm, near Kelso. It is situated within an area designated as a Nitrate Vulnerable Zone in terms of the NVZ Regulations. It is an arable farm on which are grown a variety of crops including winter wheat and winter oil seed rape. In 2008 they decided to have the farming operations on the farm carried out, on a contract farming basis, by a local contract farmer called Colin McGregor. Mr McGregor had been farming a number of other farms in the area prior to 2008. Based on results achieved by Mr McGregor on these other farms, which are said to be comparable in terms of soil and in various other respects to Spylaw, the appellants felt entitled to expect a larger than average yield of winter wheat and winter oil seed rape at harvest 2009. They therefore applied a higher than standard amount of nitrogen to these crops, as is allowed, in certain circumstances, by the NVZ Regulations. Following an inspection of the farm on 10 December 2009 the respondents determined that this application of additional nitrogen was impermissible and that it breached one of the Statutory Management Requirements (“SMRs”) of Articles 4 and 5 and Annex II of European Council Regulation (EC) No. 73/2009 and the Good Agricultural and Environmental Condition (“GAEC”) requirements of the Common Agricultural Policy Schemes (Cross Compliance) (Scotland) Regulations 2004. As a result they applied a 5 per cent reduction to the appellants’ direct support scheme payments for 2009. At the review stage referred to above the respondents accepted the appellants’ position in relation to winter wheat but not in relation to winter oil seed rape. This was, apparently, on the basis of the fact that the expected additional yield was achieved for winter wheat but not for winter oil seed rape. We return to the validity of that distinction below. It did not affect the penalty imposed. The question which came before us at debate on 11 April was whether the appellants, in making their calculation as to the maximum permissible application of nitrogen for their winter oil seed rape crop in terms of the NVZ Regulations (“Nmax” as it is called in the respondents’ guidance referred to below), were entitled to take account of yields for that crop achieved by Mr McGregor on other farms under his management. If they were not, the appellants concede that the appeal must fail. If they were, further procedure by way of an evidential hearing on certain matters will be required. At the debate the appellants were represented by Mr Hamish Lean, solicitor, and the respondents by Mr Jonathan Barne, advocate.

Legislation referred to

European Legislation

European Council Directive 91/676/EEC, Arts 1, 3, 5 and Annex III
European Council Regulation (EC) No 73/2009, Arts 4 and 6 and Annex II

Domestic Legislation

Action Programme for Nitrate Vulnerable Zones (Scotland) Regulations 2008, Regs 5, 12 and Schedule 3

The relevant law

[3] Mr Barne, whose debate this was, began by setting out the relevant law. The starting point is European Council Directive 91/676/EEC (“the Directive”). The first paragraph of the preamble to that Directive notes that the nitrate content of water in some areas of Member States is increasing and is already high as compared with standards laid down in Council Directive 75/440/EEC. Against that background Article 1 states:-

“This Directive has the objective of:

- reducing water pollution caused or induced by nitrates from agricultural sources and – preventing further such pollution”.

[4] Article 3(1) imposes on Member States an obligation to identify “[w]aters affected by pollution and waters which could be affected by pollution if action pursuant [to] Article 5 is not taken”. Paragraph (2) of Article 3 requires Member States within a two year period following the notification of the Directive to “designate as vulnerable zones all known areas of land in their territories which drain into the waters identified in paragraph 1 and which contribute to pollution.”

[5] Article 5 requires Member States within a two year period following the initial designation referred to in Article 3(2) to establish action programmes in respect of designated vulnerable zones. Said NVZ Regulations comprise the current Scottish action programme in terms of this requirement. Paragraph (6) of Article 5 requires Member States to draw up and implement suitable monitoring programmes to assess the effectiveness of action programmes established pursuant to Article 5. The inspection carried out at Spylaw on 10 December 2009 was such a monitoring exercise.

[6] Annex III to the Directive specifies measures to be included in action programmes under Article 5. Paragraph 1.3 thereof reads as follows:-

“The measures shall include rules relating to:

3. limitation of the land application of fertilizers, consistent with good agricultural practice and taking into account the characteristics of the vulnerable zone concerned, in particular:

(a) soil conditions, soil type and slope;

(b) climatic conditions, rainfall and irrigation;

(c) land use and agricultural practices, including crop rotation systems;

and to be based on a balance between:

(i) the foreseeable nitrogen requirements of the crops, and

(ii) the nitrogen supply to the crops from the soil and from fertilizations corresponding to:

- the amount of nitrogen present in the soil at the moment when the crop starts to use it to a significant degree (outstanding amounts at the end of winter),

- the supply of nitrogen through the net mineralization of the reserves of organic nitrogen in the soil,

- addition of nitrogen compounds from livestock manure,

- additions of nitrogen compounds from chemical and other fertilizers.”

We have set out this provision in full because Mr Barne founded upon it as showing the “farm-specific” nature of the relevant requirements. In that connection Mr Barne also referred to paragraph 2 of Annex III which deals with the amount of livestock manure permitted to be applied to the land each year “for each farm or livestock unit”.

[7] The need to comply with the Directive is one of the Statutory Management Requirements of Article 4 and Annex II of European Council Regulation (EC) No 73/2009 and is therefore one of the cross-compliance requirements which must be complied with by applicants for direct support scheme payments. Likewise the need to protect water against pollution and run-off is one of the Good Agricultural and Environmental Conditions which such claimants have to satisfy in terms of Articles 4 and 6 and Annex III of that Regulation.

[8] That is the European legislative background to the NVZ Regulations. Turning to the Regulations themselves, Regulation 5(1) provides:-

“Before 1st March each year, a fertiliser and manure management plan must be prepared in respect of the farm for that year.”

There is no definition of “farm” other than that Regulation 3(1) provides that it includes a livestock unit.

[9] Regulation 12, so far as relevant, reads as follows:-

“(1) The amount of nitrogen fertiliser applied on the farm to any crop must not at any time exceed the maximum figure allowed for the crop type, calculated under this regulation.

(2) Before planting any crop referred to in column 1 of table 1 in Schedule 3 on any area of land on the farm, the maximum nitrogen which can be applied to that crop for that area shall be calculated, by using the appropriate figures based on the standard yield in that table for:-

(a) the crop grown immediately previously;

(b) soil type; and

(c) any other relevant adjustments, if selected for inclusion.

(3) …

(4) …

(5) For each crop to be grown on the farm, the total sum of all the individual figures for that crop produced under paragraphs (2), (3) or (4) shall be calculated, to show the overall maximum nitrogen figure which may be applied to each crop on the farm.

(6) Subject to the other provisions in these Regulations, the overall figure calculated under paragraph (5) for each crop may be applied to that crop even in excess of the individual figure for the individual area calculated under paragraphs (2), (3) or (4), as long as the overall amount applied to the crop type on the farm does not at any time exceed the sum in paragraph (5).”

[10] Winter oil seed rape (spring) is listed in column 1 of Table 1 of Schedule 3. In terms of the table the standard yield for that crop is stated as 4.0 tonnes per hectare. The permitted application of nitrogen per hectare is then listed for four different soil types. A footnote to the table sets out the “relevant adjustments” referred to at in Regulation 12(2)(c). These include the following:-

“On winter oil seed rape, the spring application can be increased by up to 30kgN/ha if the expected yield is over 4.0t/ha.”

Grounds of appeal

[11] The first ground of appeal is in the following terms:-

“The Scottish Ministers erred in their finding in fact 8 contained within Section 4 of the Review Meeting Report dated 8th September 2010. Nothing within Regulation 12 of the Action Programme for Nitrate Vulnerable Zones (Scotland) Regulations 2008 or the note to paragraph 2.1 in Booklet 6 of the “Guidelines for farmers in nitrate vulnerable zones” provides that the higher than standard yields must relate to the farm on which the alleged breach has taken place. The Appellant was entitled to rely on historical yield data relating to other farms of similar character and within the same area which was available to the Appellant’s farm contractor Colin McGregor. This data demonstrated that the cultivation methods practised by Mr McGregor on those other farms resulted in higher than standard yields. It was not unreasonable to expect that yields similar to those achieved on those other farms could be achieved at Spylaw where the crop management regime was to be the same.”

Mr Lean stated that if that ground of appeal fell to be repelled then the whole appeal failed. For present purposes, therefore, we need not concern ourselves with the other grounds of appeal listed in the application nor with what was said about them at debate although we do touch on something said in relation to the fourth ground of appeal at paragraphs [18]below..

Submissions for respondents

[12] In moving us to refuse the appeal, Mr Barne set out the respondents’ position. It was that, in the same way as soil type and previous crop were all farm-specific factors in the application of Regulation 12, so too the yield adjustment factor could only be applied under reference to historical yield data relating to the farm in question. That underpinned finding in fact 8 in the Review Report (production 4) which was in the following terms:-

“The yield records for Spylaw farm seen at inspection do not substantiate the use of the yield adjustment factor. The appellant had calculated the Nmax for winter oil seed rape based on an expected yield of 4.5t/ha which could not be backed up by records of historical yields.”

[13] Mr Barne submitted that the wording of the ground of appeal was instructive as to the difficulties to which the appellants’ approach gave rise. The submission in the ground of appeal was that “it was not unreasonable to expect that yields similar to those achieved on those other farms could be achieved at Spylaw”. The double negative – “not unreasonable” – betrayed the uncertainty of the expectation. The same uncertainty could be seen in the appellants’ statement in support of their application for review (production 3), the third paragraph of which contained the statement that “As a result of the crop management regime change [i.e. the introduction of Mr McGregor as contract farmer] it was thought reasonable to expect to attempt to achieve yields at least in the region of other farms in the same management regime …”. The tentative nature of the wording in that statement betrayed the same uncertainty.

[14] The respondents had sent out nine guidance documents on NVZs to farmers. Mr Barne referred to number 6 in that series, headed “Planning Nitrogen Use – Calculating Nmax for Arable Crops and Grassland”. Page 2 sets out, in its various stages, the calculation to be made in arriving at the Nmax for crops other than grasslands. Mr Barne relied on a Note set out there in the following terms:

“You must be able to demonstrate higher than standard yields before using the yield adjustment factor. Although some recent crop trials have shown a higher nitrogen requirement for higher yielding crops, this is not always the case and yield related responses are less likely in barley than wheat. Therefore, if you do use the yield adjustment factor, you should carefully monitor future yields.”

Mr Barne submitted that this note set out clearly the importance of being able to demonstrate higher yields on the particular farm in question. That was reinforced by Table 8 at page 5, demonstrating the calculation of Nmax for arable crops and requiring the use of “Average yield for this crop on this farm” [emphasis added] and again at the note on Column F at page 7 which reads “Adjust for yield if your average yield is higher than the standard yield for the crop type being grown” [emphasis added] and goes on “You must be able to supply records that demonstrate higher than standard yields if you wish to use the yield adjustment factor”.

[15] As we have already observed, Mr Barne also founded on paragraphs 1.2 and 1.3 of Annexx III to the Directive as showing a “farm-specific” approach.

[16] Looked at in the light of the foregoing legislative provisions and guidance, there was no basis for saying that the person who had carried out the review here had erred in fact or in law in making finding of fact 8. No historical data relating to Spylaw Farm had been produced by the appellants. They had therefore failed to show an entitlement to apply the yield adjustment factor and this ground of appeal, and, therefore, the whole appeal fell to be refused.

[17] Mr Barne went on to observe that, as it happened, events had shown that the increased application of nitrogen had not produced the hoped for increase in yield of winter oilseed rape. Indeed the yield for that crop in 2009 had been below the standard yield. The appellants blamed that on one particularly poor field but people were not entitled to pick and choose their fields, the whole crop yield had to be taken into account. The appellants, in Ground of Appeal 3, also sought to make something out of the poor harvest conditions in 2009 but it was worthy of note that the other farms upon which the appellants relied as being comparable to Spylaw had produced yields in excess of the standard yield despite these poor conditions. This underlined the importance of having data which was specific to the farm in question.

[18] Mr Barne also addressed Ground of Appeal 4 and it is important that we should say something about that because it gives rise to an apparent inconsistency in the respondents’ approach as between their position at the review and their position in this appeal. Finding in fact 11 of the review report is in the following terms:-

Note that the element of the breach pertaining to the estimated winter wheat yield is now disregarded following the review when the appellant was given the opportunity to come forward with actual yields once the wheat had all been sold from store. This information was received from the appellant on 16 August 2010 and showed that expected yields had been achieved.”

Answer 4 for the respondents in the present appeal suggests, without stating so in terms, that had the appellants achieved the expected higher yields in respect of oil seed rape, as had happened with winter wheat, they would not have been found in breach or, in any event, penalised. Mr Barne conceded that on his approach the subsequent yield should not have been a factor and that in assessing whether a breach had been committed one looked only at the point in time when the nitrogen was applied. What the respondents had done in relation to the winter wheat crop on this occasion was simply waive insistence on the breach in the light of the results actually achieved for winter wheat.

[19] Finally, and again in relation to Ground of Appeal 4, Mr Barne sought to meet an argument that is set out there in the following terms:-

“If the Respondents were correct in their interpretation of the Regulations, it would never be possible to make an adjustment as envisaged by Regulation 12(2)(c) on any particular farm where the historical information relating to that farm showed that higher than standard yields had never previously been achieved.”

In Mr Barne’s submission that was not so. The desired historical data could be achieved by the “shrewd use” of the Nmax, applying more to some fields and less to others, as was allowed by the Regulations. If higher usage led to higher yield that would provide the appropriate historical data to justify use of the yield adjustment factor in the following year.

Submissions for appellants

[20] Mr Lean accepted that the relevant law was as set out by Mr Barne. He agreed that the nub of the case was whether the appellants had been entitled to apply the yield adjustment factor on the basis of results at comparable farms worked by Mr McGregor.

[21] In making finding of fact 11, the review reporter had been saying that retrospective justification of application of the yield adjustment factor was possible, whereas on Mr Barne’s approach it was impossible. Mr Lean submitted that the reporter’s position was more consistent with the position of the appellants in this appeal.

[22] On the respondents’ approach how could a farmer ever obtain higher yield by the application of nitrogen if he was restricted to historical data to do with his farm? If the respondents’ approach was right, where the major component of a new farming regime was increased use of nitrogen, how could that be implemented without the farmer breaching the rules? Other improvements to the farming regime might lead to slightly increased yield but where the major component of the improvement regime was the application of more nitrogen, the respondents’ approach made that impossible without being in breach of the relevant regulations in the year in which the new regime was introduced.

[23] Support could be derived for his approach from the wording of Regulation 12(2)(c), which read “any other relevant adjustments allowed, if selected for inclusion” [emphasis added]. There was nothing which stated that the relevant adjustment must be tied to the farm in question.

[24] In essence the appellants’ position was that they had correctly applied both Regulation 12 of the NVZ Regulations and the guidance contained in Guidance Booklet 6. The appellants had applied the historical yield data available to them from farms of similar soil and character which were subject to the McGregor management regime. There were good reasons, which the appellants offered to prove in this appeal, why the expected higher yield had not materialised at the 2009 harvest. The validity and sense of what the appellants had done was shown by the fact that a similar decision taken in respect of winter wheat and also based on historical data from the other McGregor farms had resulted in the anticipated higher yield.

[25] If we were to find in his favour on Ground 1 a hearing of evidence would be required in relation to certain matters but if we were to be against him on that Ground the appeal would fall to be refused at this stage.

[26] The expenses of the debate should follow success.

Mr Barne in response

[27] Mr Barne made two short points in reply.

[28] Firstly, in relation to the submission that, if the respondents’ interpretation was correct, where increased nitrogen was to be applied as the major component of a new farming regime that could only be done by breaching the regulations, the matter had to be looked at in context. This was an environmental protection measure whose purpose would not be served if one could speculatively introduce nitrogen at an excessive level.

[29] Secondly, the scheme of the NVZ Regulations was to provide for an objective calculation to be made at the time of establishing the crop and to allow use of yields from allegedly comparable farms would be to introduce a degree of subjectivity into that calculation and open the door to all sorts of issues as to what was truly comparable and what was not, with the risk that applicants would cherry-pick the data which suited them.

Decision

[30] This is an important issue for arable farmers. All arable farmers want to maximise their yield. An acceptedmethod of achieving that is by increasing the use of nitrogen so it is important for farmers to know in what circumstances they can use more than the standard amount without risk of penalty.

[31] In support of their position the respondents rely on three tiers of material: the European legislation, the domestic NVZ Regulations and their own guidance to farmers. We will confine ourselves to the first two of these since the respondents’ guidance obviously reflects only their own understanding of the law. Reference to such guidance is sometimes appropriate in appeals such as this, but it does not, we think, assist where what is at stake is the interpretation of legal provisions.

[32] EU Directive 91/676/EEC does two things. It identifies the problem and it tells Member States, in broad terms, what they must do about it. As we have seen, the problem is an increase in the nitrate content of water in some areas of Member States. As a result of that, the recital to the Directive says, “it is … necessary, in order to protect human health and living resources and aquatic ecosystems and to safeguard other legitimate uses of water, to reduce water pollution caused or induced by nitrates from agricultural sources and to prevent further such pollution; … [for which] … purpose it is important to take measures concerning the storage and the application on land of all nitrogen compounds and concerning certain land management practices”.

[33] Domestic courts, including those of the United Kingdom, are to interpret European Union provisions and domestic legislation implementing these provisions purposively and we are entitled to look to preambles and recitals to identify the relevant purpose: Bulmer v Bollinger [1974] 2 All ER 1226, per Lord Denning MR at 1237. We must therefore interpret the NVZ Regulations in such a way as gives effect to the foregoing purposes.

[34] Otherwise, what the Directive does is set out how Member States are to go about tackling this problem, in the way of identifying nitrate vulnerable zones (Article 3), devising action programmes for such zones (Article 5) and saying something about what these programmes are to contain (Annex III). We do not see anything in any of these provisions which helps with the particular problem in this case. The provisions are at too high a level of generality and not even where they become more specific, in Annex III paragraph 1.3, can we discern the “farm-specific” character which Mr Barne sought to attribute to them. Indeed the reference to limitation of fertilisers “taking into account the characteristics of the vulnerable zone concerned” can be read as pointing in the other direction.

[35] Accordingly the European Directive provides the context and purpose behind the NVZ Regulations but does not assist us beyond that. It is the NVZ Regulations themselves which deal with the requirements on individual farmers in Scotland.

[36] As we have seen, these Regulations allow for additional applications of nitrogen where the expected yield exceeds the standard yield. The term “expected yield” is neither defined nor qualified in any way. However, the expectation must clearly be reasonable. But there is nothing in the Regulations to say that such reasonable expectation must be based on historical data relating to the particular area of a farm in question. That is a requirement which is contained only in the respondents’ guidance.

[37] We see no need to import that degree of restriction into the Regulations. To do so leads to the paradox Mr Lean described: a farmer would not be allowed to do the very thing which was most likely to produce higher than standard yields because he did not already have higher than standard yields. Although we have not heard evidence on the point, as an expert court we are satisfied that Mr Barne’s suggested solution is not readily workable in practice. Where the particular crop is grown on only one area of a farm it cannot apply at all. Where there are several areas on which the crop is grown it would require judicious manipulation of the quantities of nitrogen applied to the various areas over, perhaps, a very long period to obtain on overall increase in the yield for that crop.

[38] Mr Barne emphasised the area-specific nature of the first stage of the Nmax calculation. However what was done in this case is not necessarily inconsistent with that. As long as the question whether a higher yield can reasonably be expected is properly addressed in relation to each area of the farm on which the crop is grown it does not seem to us to matter that the answer to that question is based upon results from comparable areas on other farms. In each case the only question is whether the expectation is reasonable.

[39] That approach does no violence to the environmental protection objective of the legislation. It does not lead, as Mr Barne suggested, to allowing speculative applications of additional nitrogen. That is because the farmer will always have to show that his expectation of a higher yield is reasonable. The fact that the increased application of nitrogen often leads to increased yield will not in itself be an adequate basis for expectation of a higher yield in every case. That would make a nonsense of Regulation 12. Instead something more will be required to show that the expectation of increased yield is reasonable wherever the yield adjustment factor is applied. We see no reason why that “something more” should not be in the form of data from comparable farms. We do accept that this approach leads to greater uncertainty than the respondents’ approach but we are persuaded that it is not only an approach which is permissible in terms of Regulation 12 and Table 1 of Schedule 3 of the NVZ Regulations but one which is necessary in order to make them workable.

[40] Accordingly we have repelled Mr Barne’s motion and continued the application to an evidential hearing on dates to be fixed.

Expenses

[41] Mr Lean moved that the expenses of the debate should follow success. We did not hear Mr Barne on the matter so we have followed our usual practice of inviting parties to submit written motions and submissions on expenses.

For the appellants: Stronachs, Solicitors, Aberdeen

For the respondents: Mr J Barne, Advocate; Scottish Government Legal Directorate