Neutral Citation Number: [2010] EWCA Civ 1381
Case No: A3/2010/0950

COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION 
MANCHESTER DISTRICT REGISTRY 
MERCANTILE COURT
HIS HONOUR JUDGE HEGARTY QC 

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 07/12/2010
Before :

LORD JUSTICE PILL
LORD JUSTICE JACKSON
and
LORD JUSTICE PATTEN
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Between :

	Lancashire County Council	Appellants	
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	Environmental Waste Controls Limited	Respondents	

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Mr Rhodri Williams QC (instructed by Lancashire County Council) for the Appellants
Mr Robert Jay QC (instructed by Hill Dickinson LLP) for the Respondents

Hearing date : 21 October 2010
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Judgment

Lord Justice Pill : 
1.	This is an appeal by Lancashire County Council (“the appellants”) against a decision of His Honour Judge Hegarty QC, sitting as a Deputy High Court Judge, in which he found that the appellants were in breach of the duty imposed on them by regulation 4(3) of the Public Contract Regulations 2006 (“the 2006 Regulations”).  It is common ground that Environmental Waste Controls Limited (“the respondents”), a company specialising in waste management and disposal, had a right of action in private law under regulation 47 of the Regulations.  The judge ordered that damages be assessed on the basis stated by him.
2.	This appeal does not turn on issues of statutory construction but on challenges to the soundness of the judge’s conclusions on the evidence before him and to his approach to the issues of damages.  As a waste disposal authority, the appellants have statutory duties which required them to seek offers in relation to a proposed public services contract.  They issued an invitation to tender (ITT) and followed the procedure required by the 2006 Regulations.  In the event it became what the judge described as a two-horse race between the respondents and SITA UK Ltd (“SITA”).  On 7 December 2007, the appellants decided to award the contract for all 23 household waste recycling centres subject to the tenders, to SITA, even though the respondents’ tender was significantly lower.  
3.	Award criteria had been issued by the appellants and the respondents alleged that, in a number of respects, the appellants had not evaluated the tenders in the manner required by the regulations.  In a long judgment, the judge rejected most, but not all, those allegations.  He set out his conclusions:  
“497. For reasons which I have sought to set out at some length, I have reached the conclusion that the challenge to the detailed assessment of EWC’s bid against the individual parameters promulgated in the ITT fails in the sense that no serious or manifest error has been shown to have affected any specific aspect of the assessment process, save to a very limited degree which could not have affected the outcome.  But I have nonetheless also concluded that there was a breach of duty on the part of LCC by reason of its failure to observe the principles of equality, non-discrimination and transparency imposed upon it by regulation 4(3) of the Public Contract Regulations 2006 in that it took into account concerns as to EWC’s financial standing and the price at which it had tendered which it ought not to have taken into account in considering the competing bids.  I have also found that this is likely to have influenced the assessment process and rendered it unfair resulting in serious and manifest error.  I am satisfied that, in consequence, EWC has suffered loss and damage in the form of the loss of a real or substantial chance of being the successful tenderer; and I have assessed the chance which it has lost at 50%. 
498. Accordingly, EWC has a private law cause of action for damages under Regulation 47 of the Regulations.  It is common ground that those damages fall to be assessed by reference to the profits (if any) which EWC would have made if it had been awarded the contract; but I have concluded that this must be on the assumption that the contract would have been for a period of three years only and would not have been extended to five years.”
4.	The appellants challenge the judge’s conclusion that they “took into account concerns as to EWC’s financial standing” in considering the competing bids.  It is common ground that on the procedure, as followed, the respondents’ financial standing ought not to have been taken into account when deciding between tenders.  The appellants submit that the judge applied the wrong test when deciding that those concerns had been taken into account.  They also challenge the soundness of the conclusion the judge reached on the basis of his findings of fact.  He erred in law.  They further challenge, if the point arises, the finding that the respondents suffered loss and damage as a result of the alleged breach and challenge the figure of 50% at which the loss of a chance was assessed.  The respondents submit that the judge applied the correct test, that he was entitled to conclude that the appellants had taken into account concerns as to the respondents’ financial standing and that they have suffered damage to the extent found by the judge.  
5.	Regulation 30 of the Public Contracts Regulations 2006 (“the 2006 Regulations”) implements the provisions of article 53 of Directive 2004/18/EC of 31 March 2004.  It provides: 
“(1) Subject to regulation 18(27) [award under the competitive dialogue procedure] and to paragraphs (6) and (9) [abnormally low offers] of this regulation, a contracting authority shall award a public contract on the basis of the offer which -
(a) is the most economically advantageous from the point of view of the contracting authority; or 
(b) offers the lowest price.
(2) A contracting authority shall use criteria linked to the subject matter of the contract to determine that an offer is the most economically advantageous including quality, price, technical merit, aesthetic and functional characteristics, environmental characteristics, running costs, cost effectiveness, after sales service, technical assistance, delivery date and delivery period and period of completion.”
6.	A general duty is imposed by regulation 4(3) of the 2006 Regulations, which provides: 
“(3)	A contracting authority shall (in accordance with Article 2 of the Public Sector Directive)- 
(a)	treat economic operators equally and in a non-discriminatory way; and 
(b)	act in a transparent way.”
7.	The appellants decided to evaluate the procurement exercise on the basis of option (a) in regulation 30, that is the “most economically advantageous” tender.  The Project Manager for Waste Services Procurement (Mr Birch) reported to the appellants’ Director of Waste and Natural Resources Management (Mr Browne) prior to the decision being made.  In the Report, he set out the basis on which tenders were to be evaluated: 
“Financial (50%) 
•	Management Fee 
•	Adjustment (Lot B only) 
•	Transport Cost Adjustment 
Service Delivery and Experience (40%)
•	Experience of Running Similar Facilities
•	Methods of Acceptance of Waste 
•	Experience of sourcing markets for recyclables 
•	Transportation Provision 
•	Supervision and Management Provision (including Technically Competent manager (TCM) 
•	Quality, Environmental, Safety and Staff Training Systems 
•	Operative Incentives 
•	Best Value and Continuous Improvements 
•	Suitability of proposed sites (Lot (C) and Lot (D) only) 
Health and Safety (H&S) (10%)”
There is no doubt that a meticulous appraisal was carried out and markings awarded under each of the appropriate headings.  
8.	The judge’s finding in the respondents’ favour was based solely on his finding that the appellants “took into account concerns as to EWC’s financial standing and the price at which it had tendered”.  As reflected in the judgment, the respondents’ emphasis at the hearing appears to have been on the more specific complaints about the assessment process which, following lengthy consideration, the judge decided in the appellants’ favour, as stated in paragraph 497, cited at paragraph 3 above.     
9.	The parties accept the accuracy of the approach decided by Morgan J in Lion Apparel System Ltd v Firebuy Ltd [2007] EWHC 2179.  Morgan J stated: 
“35. The court must carry out its review with the appropriate degree of scrutiny to ensure that the above principles for public procurement have been complied with, that the facts relied upon by the Authority are correct and that there is no manifest error of assessment or misuse of power.
36. If the Authority has not complied with its obligations as to equality, transparency or objectivity, then there is no scope for the Authority to have a ‘margin of appreciation’ as to the extent to which it will, or will not, comply with its obligations.
37. In relation to matters of judgment, or assessment, the Authority does have a margin of appreciation so that the court should only disturb the Authority's decision where it has committed a ‘manifest error’.”
10.	There is an issue as to whether financial strength could lawfully be treated as an award criterion in any circumstances.  It is unnecessary to resolve that issue, it being agreed that it could not properly be taken into account in this assessment process given the criteria stated.  It is common ground that, if the appellants did take into account financial standing, a consideration extraneous to the process adopted, that was a breach of duty under the 2006 Regulations.  Mr Jay QC, for the respondents, has not pursued, rightly in my view, the issue on the “clarification meeting” raised in the respondent’s notice.  In addition to the Report to the Cabinet Member, other documents were disclosed to the judge and oral evidence was given, including by Mr J Birch, the author of the Report.  
11.	Before reciting the findings of the judge, I deal with the appellants’ discrete submission that the judge applied the wrong test in law as to whether the appellants had taken into account considerations as to the respondents’ financial standing.  In my judgment, there is no merit in that submission.  It depends on the judge’s use of the word “likely” when posing the issue:
“The question is whether the assessment of the rival bids against the published criteria is likely to have been influenced by Mr Birch’s concerns about the financial position of EWC . . .”
I read that, in context, as a question whether the appellants were on balance of probability influenced by the irrelevant consideration.  The judge stated his conclusion at paragraph 457:
“So I conclude that EWC has shown that the process was influenced by extraneous considerations of which EWC was never made aware and that its tender was not, therefore, fairly and properly evaluated.”
A statement to the same effect also appeared in the judge’s final conclusion, cited at paragraph 3 above.
12.	Fortified by an indication to that effect, Mr Jay went on to submit that, as the appeal was put, that concluded the entire appeal against the appellants, the appeal being confined to whether the judge applied the correct test.  I do not accept that submission.  The judge had already stated, at paragraph 422, that “the only real question is whether LCC did, as a matter of fact, take into account considerations as to EWC’s financial standing in deciding to award the contract to SITA and not to EWC”.  In my judgment it is open to the appellants to raise that issue.  The grounds of appeal include a challenge to the judge’s finding that the financial standing of the respondents was “likely to have influenced the assessment process.”   That allegation is repeated in the particulars given.  
13.	I do not accept the relevance of the concept of apparent bias, as recognised in public law, to this case.  The case does not turn on an appearance of bias; it turns, as the judge put it, on whether “LCC did, as a matter of fact, take into account considerations as to EWC’s financial standing.” (paragraph 422)  
14.	There is no documentary evidence to show the basis on which the decision was taken on 7 December 2007 following receipt of the Report.  It can be assumed that the Report was given serious consideration.  The case has been put by Mr Jay on the basis that it was the state of mind of Mr Birch that was decisive with the judge.  The judge did however note that it was Mr Browne who was the person “responsible for signing off the final report in his capacity as Director of Waste and Natural Resources Management”.  
15.	Mr Jay’s central submission is that the judge’s core findings are unassailable as a matter of fact.  He rightly stresses the judge’s opportunity, when making those findings, to assess the evidence of witnesses and the ‘atmosphere’ of the case.  
16.	The judge’s reasoning in the 40 or so paragraphs under the heading “Financial Strength”, which preceded the conclusion stated, cannot sensibly or appropriately be set out in full in this judgment but I will need to cite extensively from them.  The central submission of Mr Rhodri Williams QC, for the appellants, is that, on the judge’s findings of fact and reasoning, the judge was not entitled to go on to hold that the appellants’ officers were influenced, albeit subconsciously, by the irrelevant consideration.  
17.	Much weight was placed by the judge on the summary in Mr Birch’s Report: 
“The evaluation of the method statement indicates that SITA has the most experience out of the 4 companies that bid and that its proposed method of working not only meets or exceeds the Specification requirements, but exceeds the method statements submitted by EWC, Neales and Greencyle in most areas.  
The following information did not form part of the evaluation process but is considered of material interest, and as such has been included in this report for information. 
Although EWC is significantly cheaper than the other 3 bidders there are concerns over EWC’s ability to provide an uninterrupted service whilst meeting the demanding specification.  These reasons are outlined below.”
Reasons are set out in detail, by reference to tables of figures.  
18.	In seeking to uphold the judge’s conclusion, Mr Jay refers to Mr Birch’s evidence, as summarised by the judge at paragraph 427:
“He did, however, inevitably, accept that there were serious concerns about EWC’s financial strength which were referred to in his various drafts and, ultimately, in the final report to Cabinet.”
19.	The judge referred, at paragraph 429, to the evidence of Mr Ellis:
“He said that he was aware of Mr Birch’s concerns about EWC’s financial strength and the possibility that they might have under-priced their bid but that he told him to ignore those concerns and carry on with a full evaluation of its tender.”
20.	At paragraph 432: 
“But beyond Mr Birch’s denials and the wording of the final report, there was an almost total lack of evidence as to how and why Mr Birch had felt it necessary to disregard these matters and how he had felt able to do so . . . Neither Mr Birch nor Mr Ellis seemed to be able to go beyond the mere assertion that he was told to ignore these concerns and that he did so.”
21.	Paragraph 433: 
“On the other hand, there is a wealth of evidence to show that, from the outset of the evaluation process, Mr Birch had serious doubts and concerns about EWC’s financial strength, the level of which it had fixed its tender price and its ability to provide the requisite services if it had been awarded the contract.  It also seems fairly plain that he took the view that, in the light of these concerns, it would not be appropriate to recommend the award of the contract to EWC.”
22.	Paragraph 434:
“Though I have dealt with this evidence in detail earlier in this judgment, it is as well to recall some of its salient features.  The documentary trail is very telling.  In his initial appraisal of EWC’s tender, Mr Birch commented upon EWC’s apparent financial standing and expressed concerns about the profitability of the contract in view of his analysis of various ‘extra costs’.  Furthermore, he clearly sought advice about these matters from Mr Holden-Ross and others; and it will be recalled that such advice was given in the form of an e-mail of 26th October 2007.”
23.	In post-hearing submissions, the respondents stated that they would wish to place before the court the entirety of the cross-examination of Mr Birch.  I am not prepared to accede to that submission, having regard to the detail with which the judge has dealt with the evidence and to the lateness of this application.  
24.	At paragraph 455, the judge referred to a section in the Report, incorporated on the advice of Mr Browne, which provided: 
“In the event that SITA’s bid is not accepted it is recommended that this procurement exercise is abandoned and that the service is re-tendered, using different evaluation methodology.”
25.	On the basis of those findings, the judge stated, at paragraph 452, that “Mr Birch clearly had serious doubts about EWC’s creditworthiness” and referred to Mr Birch’s statement that it would be “difficult if not impossible” for EWC to provide the equipment required and still make a profit.  At paragraph 453, the judge stated: “It was clearly a matter of great importance to [Mr Birch] and, no doubt to his superiors; and it is obvious that neither he nor, for that matter Mr Ellis and Mr Browne, would have wished to put forward a recommendation that the contract should be  awarded to EWC.”  
26.	The judge concluded:
“454. On the other hand, the assessment of the competing bids against the qualitative criteria cannot be regarded as a precise science.  On the contrary, there is considerable scope for the exercise of discretion and judgment at every stage.  Furthermore, it is clear that the race was extremely close.  It will be recalled that, on his initial evaluation of 26th October 2007, both tenders were awarded precisely the same mark; and, even on the final evaluation, the difference between them was no more than some 23 points out of a possible 325 points which together contributed only 40% of the total score.  It must have been extremely difficult at the best of times to discriminate between the two tenders; and Mr Birch himself accepted in cross-examination that he had not found it easy to differentiate them.  
455. I simply do not think that it would have been possible for Mr Birch, no matter how hard he tried, to put these concerns, which he had so clearly and fully articulated, entirely out of his mind for the purposes of the assessment exercise.  Nor do I think he could have avoided being influenced by what must have seemed to him so clearly to have been the desired outcome.  If these concerns had been of a comparatively trivial or minor nature, it might not have been too difficult for him to have put them to one side.  But they were clearly regarded as being of such fundamental importance as to justify the inclusion of a lengthy commentary in the various draft assessments and in the final version of the report itself.  
456. Once it had been decided that concerns about EWC’s financial position should not be directly taken into account as a reason for rejecting its bid, it is difficult to see why this detailed analysis was retained in the final report.  The very fact that it was still included seems to me to lend additional weight to the inference that it is likely to have influenced Mr Birch’s assessment of the bids against the published criteria.  Indeed, it was specifically stated in the final version of his report that this information, though excluded from the evaluation process, was nonetheless ‘of material interest’.  The logical and practical consequence of such a decision would have been to have wholly excluded these matters from the report and to have had the assessment process carried out by someone else, whose approach could not have been influenced by such concerns, and not by Mr Birch, who had been so heavily involved in this aspect of the process form the beginning. . . .”
Thus the respondents’ submission that their financial position must have “subconsciously infected” the assessment process was, in effect, accepted, notwithstanding the judge’s acceptance that Mr Birch “did his honest best to put those concerns to one side for the purposes of the assessment process itself”.  
27.	The assessment of the rival tenders was subject to detailed appraisal.  Scores under the different headings are set out in tabular form.  Though it was close, SITA came first.  Mr Williams relies on other findings of the judge.  In his evidence, Mr Birch “repeatedly insisted that he had simply not taken any of these concerns as to EWC’s financial strength into account in his evaluation of the rival bids” (paragraph 427).  The report to Cabinet specifically stated that “financial strength did not form part of the evaluation process” (paragraph 428).  The advice to Mr Birch was “to ignore those concerns and carry on with a full evaluation of its tender” (paragraph 429).  Mr Browne stated in evidence that “a full evaluation had been carried out and SITA had won on points” (paragraph 430).  “It was never directly suggested to Mr Birch that he was not telling the truth when he said that he had not taken these matters into account, at least consciously, in his assessment of the rival bids” (paragraph 431).  
28.	The judge accepted (paragraph 446) that “in the course of these e-mail exchanges, advice was given to Mr Birch to the effect that EWC’s bid could not properly be rejected simply on the grounds of its financial standing or the low price at which it had submitted its tender.  I am also prepared to accept Mr Birch understood the nature and substance of this advice”.  The judge repeated (paragraph 447) that Mr Birch was advised that EWC’s bid should not formally be rejected on the ground of financial standing.  He accepted (paragraph 448) that “concerns about EWC’s financial standing were not directly taken into account in formulating the recommendation embodied in Mr Birch’s final report, at least in the sense that its tender was not formally rejected on those grounds”.  
29.	At paragraph 450, the judge held: 
“I am not prepared to hold that Mr Birch or any of his colleagues deliberately manipulated the scores awarded to EWC and SITA respectively in order to bring about this desirable result.  Though it was suggested to Mr Birch in cross-examination that these e-mails showed that he had been ‘looking for the green light’ to allow him to take such matters into account and that he had done so because he wanted SITA to win, no case of deliberate manipulation was ever clearly and directly put to him; nor was any such case fully articulated in opening or closing submissions.  But, in any event, the way in which Mr Birch’s treatment of the financial standing issue was segregated from the assessment process with effect from 6th November 2007 onwards, and in particular his comment as to the scores which would otherwise have been awarded to EWC, provide support for the proposition that he at least attempted to carry out the assessment independently of these concerns. 
451. I conclude, therefore, that, at least from 6th November onwards, Mr Birch did his honest best to assess the rival bids against the published criteria without regard to the serious concerns which he so clearly had as to EWC’s financial position. . . .”
30.	Reference was also made by Mr Williams, and in my view rightly, to the judge’s findings under the somewhat different issue of “incumbency”.  It had been suggested by the respondents that there was a conscious or sub-conscious desire in the appellants’ officials to favour SITA “having regard to the connections between the personnel of LCC and SITA”, that is on existing contracts (paragraph 405).  On that issue, the judge stated that he “would unhesitatingly acquit them [the officials] of any such charge”.  The judge also rejected, at paragraph 413 “any allegation of bias or conscious or sub-conscious partisanship in the assessment of the rival bids”.  
31.	I accept that it was put to Mr Birch that his judgment was influenced by concerns about EWC’s financial health (paragraph 450).  The judge found, at paragraph 450, that there was no deliberate manipulation of the scores awarded.  “No case of deliberate manipulation was ever clearly and directly put to [Mr Birch]”.  The judge found (paragraph 451) that Mr Birch did his “honest best”.   
32.	I would be prepared to hold, in an appropriate case, that a judge would be entitled to find that the decision maker was in fact influenced by an irrelevant consideration, even though he was honestly not aware that he was influenced.  I am not prepared to do so on the findings in this case.  The issue must be considered in the context not of a “hunch” preference for one tenderer over another but in the context of a carefully devised and operated assessment procedure, with scores under many headings.  If that procedure is honestly operated, as the judge found it was, it is extremely difficult to go on to find that the process was defective by reason of regard for an irrelevant consideration.  Subconscious bias as between SITA and EWC, was expressly found not to have been present on another aspect of the choice.  
33.	Mr Birch was acting professionally and had been advised to ignore the financial standing of EWC.  He said that he followed the advice and ignored the issue.  He was found by the judge to have been an honest witness.  A court should in my view be very slow in such circumstances to find that he was influenced by that issue.  Even lay jurors are relied on in criminal cases to ignore against one defendant evidence admitted as material to another.     
34.	Moreover, even though I accept that in the case of witnesses found to be honest, a judge may on some occasions hold that they were influenced by sub-conscious considerations, contrary to their belief, it is vital that it is put to them in the plainest terms that they were so influenced.    
35.	The cross-examination of Mr Browne, the responsible Cabinet Member was, the judge found at paragraph 430 “mainly directed to the issue of pension provision” and not therefore to subconscious influences.  It was not even suggested to Mr Birch that he was not telling the truth when he said that he had not taken financial standing into account (paragraph 431).  Moreover, the judge has relied heavily in reaching his conclusion on the presence in the Report of a recommendation that if SITA’s bid was not to be accepted, the contract should go out to re-tender rather than being awarded to EWC (paragraph 448).  The judge noted, however, in the same paragraph, that “none of this was specifically put to Mr Birch or to Mr Browne who was, seemingly, responsible for this particular passage”.  
36.	In the context of a carefully devised selection procedure, which relied on awarding marks on each of the relevant considerations, a procedure operated by honest and efficient witnesses who knew which considerations were relevant and which were irrelevant, and when the case that they were influenced by irrelevant considerations was not fully put to them when they gave evidence, the judge was not, in my judgment, entitled to conclude that the procedure was infected by reliance on an irrelevant consideration.  In finding that the respondents took into account concerns as to the appellants’ financial standing and the price at which it had tendered, the judge erred in law.  
37.	Neither side has proposed re-trial and that is not surprising in the circumstances.  On the basis of his findings, as summarised, the judge was not entitled to conclude that the respondents had been treated unfairly or had suffered loss and damage in the form of a loss of a chance of being the successful tenderer.  Their claim must fail.    
38.	That being so, it is not necessary to consider whether the judge’s finding that the loss of a substantial chance of being the successful tenderer could be assessed at 50% is tenable.  The judge made his findings, at paragraphs 493 and 494:
“The tendering exercise was clearly a two-horse race. Neither Neales nor Greencyle were contenders.  I cannot re-mark bids; and I do not know how the assessment process would have ended if the bids had been marked by someone other than Mr Birch and in the absence of any concerns about EWC’s financial position.  Nor do I know whether LCC might legitimately have decided to put the contract out for re-tender and, if so, how the bids might have been reformulated.  
Doing the best I can on such exiguous material, I have come to the conclusion that I cannot say whether, but for the breach of duty, EWC or SITA would have won the contest.  Both would have been a substantial chance of doing so.  Accordingly, I would assess the loss of the chance at 50%.”
39.	I agree with the judge that the available material was exiguous.  If that finding was to be made, I would have expected further analysis of the actual marks awarded in the assessment exercise and the extent to which they were affected by the improper subconscious consideration.  Further, exploration of whether the appellants might legitimately have decided to put the contract out for re-tender and, if so, how the bids might have been re-formulated would have been expected.  It may fairly be said that it was for the appellants to call evidence that they would go to re-tender if they wished to take the point they now take.  There appears to be no evidence as to whether the recommendation for re-tender would have been implemented by the decision maker if the contract would otherwise have gone to the respondents.  
40.	I have said as much on this issue only to underline the tenuous evidence from the parties on which the judge was expected to assess the loss of a chance.  I do not decide the issue.  I do accept the judge’s conclusion that, were the respondents to be successful, and were a substantial loss of a chance to be established, the judge was in my view correct to value the prospective loss by reference to a three year rather than a five year contract.  
41.	I would allow the appeal and dismiss the claim.   
Lord Justice Jackson : 
42.	I agree with the judgment of Pill LJ and with the reasons which he gives.  However, since we are differing from an experienced mercantile judge, I shall add a few words of my own.
43.	The judge has set out the facts and the reasons for his conclusions in a thorough and reasoned judgment, which has enabled this court to review the decision without recourse to the underlying evidence.
44.	It frequently happens that judges, tribunal members and other decision makers are aware of facts which, from a common sense point of view, are relevant (and possibly even important) but which they are not permitted to take into account.  The decision maker is human.  The best that he or she can do is to embark upon an objective assessment, consciously focusing upon the matters which he or she is required or permitted to consider and consciously putting out of his or her mind the other matters.  If the decision maker does that, any court or higher court reviewing the decision should not embark upon the question whether subconscious influences were at work, as EWC contended in this case.
45.	On the judge’s findings of fact the decision makers in this case did all that could properly be expected of them.  I would therefore allow the county council’s appeal.
Lord Justice Patten :
46.	I agree with both judgments.