Abbeyfield Newcastle Upon Tyne Society Limited v Newcastle City Council [2014] EWHC 2437 (Ch)

Newcastle City Council (“the Council”) were under a statutory duty to make arrangements for providing residential accommodation for anyone in need of care and attention not otherwise available to them.  By section 26(1) of the National Assistance Act 1948 the Council could make those arrangements with a voluntary organisation. Abbeyfield Newcastle upon Tyne Society Limited (“Abbeyfield”) was a registered charity established to run care and supported sheltered homes. Abbeyfield was one of (at the relevant time) 52 care providers which the Council used to enable it to discharge its statutory obligations. Some of these providers, including Abbeyfield, belonged to an association called “Care North East” (“CNE”) which supported providers.

 

In 2005 the Council began to focus on the quality of provision and the question of graded fees arose. In 2007 the Council commissioned a report from PriceWaterhouse Coopers (“PWC”) into the cost of residential and nursing care for older people in Newcastle upon Tyne. The resulting report (“the PWC Report”) was prepared solely on the instructions of the Council and with only the Council’s interests in mind. This report led to the recommendation (accepted by the Council, but with modifications) that graded rates should be paid to providers.

 

In 2009 the Council and Abbeyfield entered into a “Pre-placement Agreement” (“PPA”) for residential homecare provision. This was in effect an umbrella agreement under which provision for individual residents was “called off”. Notwithstanding the date of entry, the agreement took effect as from the 1 October 2007 and included the graded rates for quality.

 

In order to apply the provisions of the PPA to any individual placement of a resident there was a separate agreement between Abbeyfield, the Council and the resident in the relevant Abbeyfield home (“the User Agreement”). However, whilst the PPA had a fixed expiry date of the 1 April 2010 the User Agreement continued for the life of the resident unless terminated in accordance with the provisions of the User Agreement or terminated in accordance with the provisions of the PPA (an “evergreen” clause).

 

The price to be paid under the User Agreement was that fixed in accordance with the PPA or as varied by the PPA, and (by clause 3.4 of the User Agreement) Abbeyfield could increase the price only in accordance with the PPA.  The PPA was due to expire on 1 April 2010.

 

On the 11 January 2010 Abbeyfield invoked the Price Review Exercise under the PPA by serving a written notice in accordance with Schedule 8 of the PPA. The following day the Council wrote to propose the arrangements for contracts operative from 1 April 2010. The Council sought to (a) achieve a three year freeze at the rates currently payable, and (b) to avoid the implementation of the Price Review Exercise, which might produce data indicating that an increase in fees was warranted (and which the Council would be obliged to consider).

 

In January 2010 the fees paid by the Council for residents which it had placed in Abbeyfield homes were £436.00 per week (the rate fixed in 2009). The fees paid by privately funded residents were £456.00 per week. On the 1 February 2010 (immediately before the expiry of the PPA) the fees payable by private residents rose to £465.00 per week. Abbeyfield took the view that it was wrong that residents funded by the Council should pay £436.00 per week (fixed) whereas privately funded residents should pay £465.00 per week (rising) for the same service. Abbeyfield was a charity and thought the Council’s proposal of a freeze financially unsustainable and therefore rejected the Council’s offer of new terms.

 

In their response, the Council indicated that it intended to consult with individual providers rather than through the CNE Group as a representative body.  Since the Council would not implement the Price Review Exercise provided for in Schedule 8 to the PPA it was implemented by the CNE on the 11 March 2010. The report prepared for this purpose advised that assuming an occupancy rate of 95% (a) using the PWC model the cost of care per occupied bed per week was £477.00 in a Grade 1 home, and (b) using the Rowntree 2008 model was £496.00 per week. (The comparable figures for a Grade 2 home, which was the rate which the Council paid even for a Grade 1 home, were £462.00 and £476.00). If costs were assessed by reference to actual occupancy rates then the cost of care per occupied bed per week on the PWC model for a Grade 1 home was £487.00, and under the Rowntree 2008 model was £510.00. Each of these figures was far above the £436 (frozen for 3 years) that the Council was proposing.

 

The Council modified its original proposal for a 3 year fixed price (by reducing it to 2 years) but otherwise rejected the results of the Price Review Exercise.  By the 22 June 2010 the Council had negotiated contracts with 29 out of the 52 providers and required the remaining providers to enter contracts. The Council stated:

 

“As from Monday 12 July 2010 homes not in contract with the Council will be removed from the Council’s standing list forthwith as the Council can offer a wide choice to users from the 29 homes that have agreed the contract terms and its variations. For those homes which remain out of contract, we will commence a process of individual user contracting, to empower users and their families, through the Council, to monitor the quality of service in their home”.

 

Mr Justice Norris found that this threat was plainly unlawful. The Council could not lawfully exclude any provider from a list. It was bound to consider any provider selected by a proposed resident, though it could insist that it would only contract on its standard terms and pay its usual rates.

 

Abbeyfield would not concede, pointing out that the Council was paying less per week than were Northumberland, Durham, Hartlepool, South Tyneside, North Tyneside and Redcar and Cleveland. Abbeyfield asked to be paid £465.00 per week on a quantum meruit basis pointing out that this was far lower than the costs assessed in the PwC report.  In its response the Council argued that as it had made clear that it was only prepared to offer £436.00 per week and that as Abbeyfield had continued to provide services to Council funded residents at its home “by conduct and implication this rate was agreed between the parties”.

 

In October 2011 the Council notified the dissentient providers (including Abbeyfield) that as they had not signed the new terms and conditions the Council would only pay the rates payable under the expired PPA in respect of existing residents and would cease placing new residents forthwith. Within a matter of days all providers but Abbeyfield signed up to the Council’s terms.

 

On 26 March 2012 the Council fixed rates payable to providers for the period from April 2012 (when the 2-year fixed price contract applicable as from April 2010 expired) until April 2013: and it required those providers who were in contract with it to agree those new rates, in default of which no new placements would be made. The rate so fixed was £455.

 

On the 17 July 2012 Abbeyfield commenced proceedings against the Council. The case advanced was that the Council (a) had been unjustly enriched in refusing to pay the cost which a reasonable person in the Defendant’s position would have had to pay for [Abbeyfield’s] services (“the Market Value”) and it would be unconscionable for [Abbeyfield] not to be recompensed; and (b) had refused to pay the reasonable cost pursuant to an implied term under a preliminary contract in which there was no agreement as to price.

 

The argument on unconscionability referred to a failure to consider the PWC report as to the Reviewed Rate, and relying on the moral and legal scruples of Abbeyfield not to insist that the Council remove residents for whom it refused to pay the true cost, and relying upon the families of residents to make up part of the shortfall between the true cost of providing the service and the payment made by the Council.

 

The Council asserted (a) that it must balance its statutory duties to fund the cost of residential care for residents placed with independent providers against its fiduciary duty to those who funded the Council’s work; (b) that in making its contract offer the Council was setting the usual cost of care within its area for the period from 1 April 2010 to 31 March 2013; (c) that in so doing it was exercising a public function which was not challenged by Abbeyfield by way of judicial review; and (d) that the present action was an abuse of process because Abbeyfield should have sought a judicial review.

 

After commencement of the proceedings two relevant events occurred.  The CNE sought judicial review of the Council’s rate-setting decision on the grounds that the Council had failed to inform itself of the costs to care home providers of providing services.  It was decided that the Council’s decision to fix the usual rates to providers for 2012-2013 was unlawful (R (on the application of the Members of the Committee of Care North East Newcastle) v Newcastle City Council [2012] EWHC 2655 (Admin)).

 

In addition, the Council had abandoned its insistence that Abbeyfield was only entitled to the weekly rate that had been agreed in 2009 and was the rate last payable under the PPA. On 4 November 2013 the Council accepted that it would pay Abbeyfield at its Grade 1 rate for the period from 1 May 2012, so that whereas the Council had been insisting it only had to pay £436 per week now it acknowledged that it had to pay £473.20 (although Abbeyfield’s fees to private residents were £513), and £482.66 from 1 April 2013 (although Abbeyfield’s private fees were £527). A month later the Council made a further concession and accepted that it was liable to pay £455 (though Abbeyfield’s private fees were £483 at this point). The result was that immediately before trial the Council’s position became that Abbeyfield should be treated the same as other providers rather than singled out for punitive treatment simply because it had refused to sign the new PPA.

At trial Mr Justice Norris found that the principle of “holdover” did not apply and a new contract did not come into existence by conduct (as counsel for the Council had submitted).  He found that (following the Court of Appeal in Whittle Movers Ltd v Hollywood Express Ltd [2009] EWCA Civ 1189), whilst parties are negotiating a contract under which they will enter into reciprocal obligations binding each other as to future performance, it is highly unlikely that by conduct they will conclude in the interim an executory contract containing terms still the subject of negotiation.  Abbeyfield and the Council were plainly in intense negotiations as to the rate payable for residents then placed with Abbeyfield: and they were also in negotiation over other terms of the new contract.

 

In his judgment the appropriate analysis was not to concentrate upon the PPA, but upon the User Agreement. The User Agreement continued to exist at all material times. It continued to bind the Council and Abbeyfield in relation to each Council-funded Abbeyfield resident as at the expiration of the PPA and even if no new PPA was agreed. Under the User Agreement the Council was bound to pay the rate fixed in accordance with the PPA as varied in accordance with the PPA. The PPA had a fixed expiry date of 1 April 2010. The User Agreement made no specific provision as to the price payable where there was no current PPA and there could be no variation under any current PPA.

 

Mr Justice Norris found that the User Agreement, properly construed, did not mean that because the PPA expired by effluxion of time, the rate payable under the User Agreement at the point of expiration should continue to be the rate payable during the remainder of the resident’s life unless the parties were able to agree some other rate. The User Agreement must be read in the context of the PPA current at the time when it was entered. This contained an extremely elaborate Price Review Exercise capable of being invoked six months before the PPA expired. There was an implied term that in the event that the contractual price-setting mechanism broke down then a reasonable price would be paid.  In his judgment “a reasonable price” would fall to be determined on the footing that the obligations in the PPA had been performed during its currency and on the footing that the Council would perform its statutory obligations and adhere to non-statutory guidance when it came to exercising an “absolute discretion” (Gibb v Maidstone and Tunbridge Wells NHS Trust [2009] EWHC 862 (QB) followed).

 

As to contractual obligations, the PPA obliged the Council to participate in a Price Review Exercise if Abbeyfield so elected six months before the expiration of the PPA, and then to take into account its results. A price that was fixed by deliberately excluding from consideration the results of a Price Review Exercise could not be “a reasonable price” for the purposes of the implied term. So the frozen £436 on which the Council insisted cannot have been “a reasonable price” (even though the contract quite clearly gave the Council a discretion not to accept the results of the Price Review Exercise as determinative). But by the same token, the results of the Price Review exercise could not be relied upon by Abbeyfield as establishing “a reasonable sum” either: the parties to the PPA contemplated that the Council would not be bound by the outcome of the Price Review Exercise.  The Price Review Exercise was plainly intended to assist in ascertaining the actual cost of providing care.

 

The court held that the “reasonable rate” to be paid under the User Agreement was one ascertained by complying with the contract, which enabled the parties to comply with their respective statutory obligations, which followed the statutory and non-statutory guidance (or deviated from it for proper and clearly articulated reasons) and in which the Council took into account all relevant considerations and excluded irrelevant considerations.

 

The £436 per week frozen for two years that Abbeyfield was offered did not constitute “a reasonable rate” for the purposes of the term implied into the User Agreement. It deliberately ignored the provisions of Schedule 8 to the PPA. At no point had it demonstrated that the Council either knew or had taken into account the actual costs of care and it had not articulated any reasons for departing from the statutory or non-statutory guidance.

 

So what was a “reasonable rate” for the purposes of the User Agreement? The court received no direct evidence on the point and Mr Justice Norris stated that, following the rate lawfully fixed for April 2009 of £436, it was established that the lawful rate from the end of April 2012 was £473. Drawing a straight-line graph between those two points suggested that the reasonable rate payable from the beginning of April 2010 to the end of March 2011 was £450 and the reasonable rate payable from the beginning of April 2011 to the end of March 2012 was £460. The court noted that this was not out of line with the ex gratia rate of £455 which the Council “conceded” should be offered from the beginning of October 2011.

 

The rate of £450 payable to Abbeyfield from April 2010 was above the £436 accepted by the other providers, but Mr Justice Norris found that the fact that 51 providers accepted a rate that was not in his judgment lawfully set, and then failed to judicially review it, did not establish that rate as “a usual cost” (which the reasonable rate payable under the User Agreement could not exceed). The failure of others judicially to review an unlawfully set rate could not curtail Abbeyfield’s private law rights.

 

 

Comment

 

This is the first case that the site proprietor knows of in private law proceedings where a provider and council have ever been so determined to fight to the bitter end that they have both been prepared to take the risk of a judgment in open court, which would set a precedent which must be followed. Not as to rate, but as to a number of very important other things:

 

An evergreen clause does not always mean that the people in the beds on termination stay there forever as council clients at the rate in force at termination: the underlying context for variation under the prior agreement is relevant, including the prior approach to agreeing a variation.

 

Keeping the clients in the beds is not such as to justify the imputation of a fresh agreement on the council’s terms, by conduct.

 

Not removing them is not such as to impute agreement by the council to pay the home’s terms.

 

A quantum meruit will or can arise in those circumstances: that is a private law footing for payment in the absence of contract, for a reasonable rate.

 

In determining a reasonable rate, the council cannot say that its public body status gives it any particular right to take its resources into account as determinative of what it will offer: it is a purchaser, like anyone else, and it does not have to place people in homes that are not willing to provide beds at a usual rate; however, the usual rate must be rationally set, and lawfully set. That involves taking account of the real state of the market, and costs of the provider, the contractual basis for approaching negotiations, the Building Capacity guidance, and all relevant considerations.

 

In a market where the council is a dominant purchaser, the fact that other homes accept a rate which the court has been found to have been set unlawfully, and do not judicially review that process, is not a factor which could curtail the private law rights of the provider of ongoing care to persons owed a duty, but outside of any contract with the council.

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