I don't understand Lord Greene's standpoint here. What exactly did he mean by "the merits of the decision"? How can unreasonableness not involve any consideration of the decision's merits?
This refers to the second limb; it is not for the court to interfere with the decision unless it is totally and utterly unreasonable.
For example, it's perfectly possible that given the exact same set of circumstances and conditions, two different public bodies may make different - and yet reasonable - decisions.
This is how the Master of the Rolls put it in his judgement:
In the present case, it is said by Mr. Gallop that the authority acted unreasonably in imposing this condition. It appears to me quite clear that the matter dealt with by this condition was a matter which a reasonable authority would be justified in considering when they were making up their mind what condition should be attached to the grant of this licence. Nobody, at this time of day, could say that the well-being and the physical and moral health of children is not a matter which a local authority, in exercising their powers, can properly have in mind when those questions are germane to what they have to consider. Here Mr. Gallop did not, I think, suggest that the council were directing their mind to a purely extraneous and irrelevant matter, but he based his argument on the word “unreasonable,” which he treated as an independent ground for attacking the decision of the authority; but once it is conceded, as it must be conceded in this case, that the particular subject-matter dealt with by this condition was one which it was competent for the authority to consider, there, in my opinion, is an end of the case. Once that is granted, Mr. Gallop is bound to say that the decision of the authority is wrong because it is unreasonable, and in saying that he is really saying that the ultimate arbiter of what is and is not reasonable is the court and not the local authority. It is just there, it seems to me, that the argument breaks down. It is clear that the local authority are entrusted by Parliament with the decision on a matter which the knowledge and experience of that authority can best be trusted to deal with. The subject-matter with which the condition deals is one relevant for its consideration. They have considered it and come to a decision upon it. It is true to say that, if a decision on a competent matter is so unreasonable that no reasonable authority could ever have come to it, then the courts can interfere. That, I think, is quite right; but to prove a case of that kind would require something overwhelming, and, in this case, the facts do not come anywhere near anything of that kind. I think Mr. Gallop in the end agreed that his proposition that the decision of the local authority can be upset if it is proved to be unreasonable, really meant that it must be proved to be unreasonable in the sense that the court considers it to be a decision that no reasonable body could have come to. It is not what the court considers unreasonable, a different thing altogether. If it is what the court considers unreasonable, the court may very well have different views to that of a local authority on matters of high public policy of this kind. Some courts might think that no children ought to be admitted on Sundays at all, some courts might think the reverse, and all over the country I have no doubt on a thing of that sort honest and sincere people hold different views. The effect of the legislation is not to set up the court as an arbiter of the correctness of one view over another. It is the local authority that are set in that position and, provided they act, as they have acted, within the four corners of their jurisdiction, this court, in my opinion, cannot interfere.
Wednesbury unreasonableness has two aspects
Lord Greene MR identified two types of unreasonableness:
a decision that took into account irrelevant considerations or did not take into account relevant considerations; and
where a discretionary decision was "so unreasonable that no reasonable authority could ever have come to it" – and that required "something overwhelming".
Within these boundaries an administrative decision can be wrong, that is, not the decision that a court or another administrative body might have made in the same circumstances. It is not the role of the court to take the decision-maker’s discretion away - so long as the decision reached is one that is within the very broad realms of “reasonable” the court will enforce it.
As such, even if the case has been wrongly decided on the facts (“its merits”) it will stand unless the decision is “something overwhelming” in its unreasonableness. Whether it’s a matter of “fundamental importance” or not seems irrelevant.
"The merits of the decision" or "of the case" means a decision based on the actual facts and circumstances of the particular case, not on a general legal principle. For example if a decision was made in bad faith, or if it was so absurd that no reasonable body would have made it, one need not go into the details of the case to know that the decision would be rejected. But when the question turns on the specific facts, or perhaps on who is to be believed, that is a decision on the merits.
I am not familiar with the Wednesbury Case or exactly what "principle of unreasonableness" was put forward in that case.
By the way, in future, it is better to reproduce a quote in normal text than to include an image of text, when possible. The image is not searchable and screen readers can do nothing with it.