England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
MANCHESTER DISTRICT REGISTRY
MR JUSTICE STUART-SMITH
Claim Number 1AC00262/M12X176

		Royal Courts of Justice Strand, London, WC2A 2LL
		16/04/2014

Lord Justice Vos:

Introduction

1. This is an appeal against the decision of Stuart-Smith J who dismissed an appeal by the claimants, Dr Sanjay Pitalia and Dr Shikha Pitalia (the "Pitalias"), who run a General Practitioner medical practice, from the order of District Judge Ralph granting a stay of these proceedings against the defendant, the Central Lancashire Primary Care Trust (the "CLPCT") under section 9(1) of the Arbitration Act 1996 (the "AA 1996").
2. Primary Care Trusts (including CLPCT) ceased to exist from 1^st April 2013 and responsibility for commissioning General Practitioner services passed from Primary Care Trusts to the National Health Service Commissioning Board (known as "NHS England"). The National Health Service Commissioning Board was ordered to become the respondent to these proceedings in the place of CLPCT by an order made by this court following the permission hearing on 14^th November 2013. Despite these changes, I shall refer to the respondent in this judgment by its old title of CLPCT.
3. The contractual relationship between the Pitalias and the CLPCT has not always been clear, but before us it was common ground that it underwent three relevant stages:-

i) First, in April 2003 the parties entered into a pilot Personal Medical Services Agreement (which I shall call the "PMS pilot agreement").

ii) Secondly, on 1^st April 2004, when pilot schemes were abolished under section 178(1) of the Health and Social Care (Community Health and Standards) Act 2003 (the "2003 Act"), the pilot agreement became a transitional agreement (the "PMS transitional agreement") under articles 1 and 58 of the General Medical Services and Personal Medical Services Transitional and Consequential Provisions Order 2004 (the "PMS Transitional Order 2004").

iii) Thirdly, on 27^th April 2004, the Pitalias signed a PMS variation agreement with the CLPCT varying the PMS pilot agreement and bringing the PMS transitional agreement to an end (the "PMS variation agreement").

4. DJ Relph granted a stay of the proceedings under section 9(1) of the AA 1996 making two important holdings: first, that the dispute resolution procedure contained in the PMS pilot agreement was a proper arbitration procedure that subsisted after the PMS variation agreement, so that an application could be made for a stay under section 9(1) of the AA 1996, and secondly that the PMS pilot agreement as varied by the PMS variation agreement was an "NHS contract" within the meaning of section 9 of the National Health Service Act 2006 (the "NHSA 2006"), which replaced in very similar terms the previous provision in section 4 of the National Health Service and Community Care Act 1990. I shall refer in this judgment to section 9 of the NHSA 2006, even though it post-dated most of the relevant events.
5. The importance of the question of whether the arrangements between the Pitalias and the CLPCT were or were not an "NHS contract" is that, if they constituted an NHS contract, section 9(5) of the NHSA 2006 provides that an NHS contract "must not be regarded for any purpose as giving rise to contractual rights or liabilities". An NHS contract cannot, therefore, be sued upon in the courts.
6. DJ Relph's holding that, if the contractual provisions of the PMS pilot agreement survived after the PMS variation agreement, there was a binding arbitration agreement between the parties, although technically raised, was not the focus of the Pitalias' appeal. Instead, in the broadest outline, the Pitalias contended before Stuart-Smith J that the effect of the PMS Transitional Order and the National Health Service (Personal Medical Services Agreements) Regulations 2004 (the "PMS Regulations 2004") was that the dispute resolution procedure in the PMS pilot agreement had been supplanted by the permissive arrangements for a reference for a determination to the Secretary of State (in relation to a non-NHS contract) contained in regulations 93-97 of the PMS Regulations 2004.
7. The result of the Pitalia's appeal to Stuart-Smith J was that he rejected the argument that the dispute resolution procedure in the PMS Regulations 2004 supplanted those in the PMS pilot agreement, and held therefore that, even assuming in the Pitalias' favour that the arrangements after 27^th April 2004 were not an NHS contract, the dispute resolution procedure in the PMS Regulations 2004 survived and the stay was properly granted. He did not, therefore, find it necessary to decide what he described as the "difficult point" about whether or not the PMS variation agreement was an NHS contract.
8. Before us, the argument took a rather different turn. We said at the outset that it seemed to us that the case turned on whether or not the PMS variation agreement was or was not an NHS contract, and we asked for argument to be initially confined to that point. As appears in this judgment, I have concluded that DJ Relph was right to find that the PMS variation agreement was an NHS contract. At the end of the argument on this point, we said we would reserve judgment, but invited the parties to address submissions to the question of what relief would be appropriate if the PMS variation agreement were held to be an NHS contract. Mr David Lock QC, counsel for the CLPCT, accepted that, if that were the case, his application for a stay was (and had always been) inapt, and that the CLPCT ought to have been applying for the proceedings to be struck out on the grounds that an NHS contract cannot give rise to contractual rights or liabilities under section 9(5) of the NHSA 2006, so that the Pitalias can have no cause of action. A debate then developed as to whether the Pitalias would be prejudiced by the CLPCT now being permitted to amend to seek a strike out instead of a stay. Pursuant to the court's direction, on the day following the hearing, the CLPCT filed a draft amended application seeking to strike out the proceedings on the grounds I have described. I will return to the question of prejudice in due course.
9. For the reasons, therefore, that I have sought shortly to explain, this judgment is limited to the questions of (1) whether the PMS variation agreement was an NHS Contract, and (2) if so, whether the CLPCT should be granted permission to amend its application to seek to strike out the proceedings. Since I understand that the court is agreed as to these points, it will not be necessary to deal with the remaining points that Stuart-Smith J considered.

Chronological background

10. In the light of my rather detailed introduction, I can deal with the chronological background quite briefly.
11. As I have said, in April 2003 the parties entered into the PMS pilot agreement. Section 6.1 of the PMS pilot agreement described the Pitalias' organisational status as "GP Practice with Health Service Body status". The importance of their being described as having "Health Service Body status" is that section 9(1) of the NHSA 2006 provides that an NHS contract is "an arrangement under which one health service body ("the commissioner") arranges for the provision to it by another health service body ("the provider") of goods or services which it reasonably requires for the purposes of its functions". Since the CLPCT is a health service body, the description of the Pitalias as a health service body made the PMS pilot agreement an NHS contract. The dispute resolution procedures that DJ Relph found to be a binding arbitration agreement were contained in clause 5.6.2 and schedule 3 to the PMS pilot agreement. I do not need to set out these provisions in this judgment.
12. On 1^st April 2004, again as I have said, the pilot phase of PMS agreements came to an end. I shall need to consider in a moment in a little more detail the provisions of articles 57-69 of the PMS Transitional Order 2004 that deal with the effect of that change.
13. On 27^th April 2004, the Pitalias signed the PMS variation agreement. It is common ground that the PMS variation agreement did not contain a term stating that it was an NHS contract. It provided that "[t]his contract variation has been issued due to a number of flexibilities introduced into the new national General Medical Services (GMS) which also apply to PMS providers", and continued in clause 2.1 to provide that "[f]rom the 1^st April 2004, the PMS pilot will become permanent".
14. On 30^th March 2010, the Pitalias issued proceedings in the Accrington County Court claiming damages for breach of contract for the CLPCT's failure to pay superannuation contributions in accordance with the NHS scheme from 2003 onwards. At the time they issued the proceedings, the Pitalias had forgotten about the PMS variation agreement, but nothing now substantively turns on that point.
15. On 8^th September 2011, the CLPCT applied for a stay of the proceedings under section 9(1) of the AA 1996 so that the dispute could be referred to the Secretary of State for consideration and determination.
16. On 13^th April 2012, the Pitalias wrote to the CLPCT giving notice that they wished to "vary the PMS Agreement in accordance with Regulation 9 of the [PMS Regulations 2004] removing the provision that the agreement is an NHS contract". The notice was served without prejudice to the Pitalias' contention that the PMS variation agreement was not an NHS contract in any event.
17. On 23^rd August 2012, DJ Relph stayed the proceedings, and on 19^th September 2012, HHJ Platts granted the Pitalias permission to appeal to the High Court.
18. In November 2012, the Pitalias and the CLPCT entered into an agreement that provided that "[w]ith effect from 1^st December 2012 the Agreement shall be varied in accordance with clause 3.2" (the "2012 PMS variation agreement"). Clause 3.2 provided that the PMS pilot agreement was not an NHS contract. It should be noted that this 2012 PMS variation agreement purported to vary the PMS pilot agreement, and not the PMS variation agreement.
19. On 26^th March 2013, Stuart-Smith J dismissed the appeal from DJ Relph, leaving in place the stay that she had granted. On 14^th November 2013, Gloster LJ granted permission for a second appeal.

The PMS Transitional Order 2004

20. Article 1 of the PMS Transitional Order 2004 defined a "transitional agreement" as one "which is deemed under article 58 to have been made under section 28C of the [National Health Service Act 1977 (the "1977 Act")] and which has not been varied in accordance with article 59".
21. Article 58 of the PMS Transitional Order 2004 provided that: "[a]ny pilot scheme under which personal medical services were being provided on 31st March 2004 shall, on the coming into force of section 178(1) of the 2003 Act (abolition of pilot schemes) in relation to personal medical services, be deemed to have been made under section 28C of the 1977 Act and accordingly shall not cease to have effect merely because of the repeal of Part 1 of the 1997 Act in relation to personal medical services".
22. Article 59 of the PMS Transitional Order 2004 provided that:

"(1)  The parties to a transitional agreement shall as soon as is reasonably practicable after 1st April 2004 enter into discussions with each other with a view to agreeing variations to the transitional agreement that will ensure that the terms of the transitional agreement comply with the [PMS Regulations 2004].

(2)  Subject to paragraph (3), no variation shall have effect unless it is in writing and signed by or on behalf of the contractor and the relevant body.

(3)  If the parties to the transitional agreement have not agreed variations to the transitional agreement by 30th September 2004, the relevant body shall vary the transitional agreement without the consent of the contractor so that the terms of the transitional agreement comply with the [PMS Regulations 2004]. …

(6)  The parties to a transitional agreement may not agree (whether under this article or otherwise) any variation to the transitional agreement that would be contrary to the [PMS Regulations 2004]."

23. Article 60 of the PMS Transitional Order 2004 contained some detailed provisions as to the way in which a transitional agreement should be interpreted before the parties had agreed a variation to it under article 59(1). Article 60(2)(i) provided that any reference in a transitional agreement to a pilot scheme or a pilot agreement should be a reference to transitional agreements.
24. Article 68 of the PMS Transitional Order 2004 provided that:

"(1) A contractor (other than one falling within paragraph (2)) which was, on 31st March 2004 a health service body … shall be regarded as such a body after that date and regulation 9 of the [PMS Regulations 2004] shall apply as if health service body status had been conferred on that contractor under that regulation".

The PMS Regulations 2004

25. Regulation 9 of the PMS Regulations 2004 made detailed provisions for a PMS contractor to opt in and out of being a health service body by requesting a variation to the agreement that it enters into with a PCT. Save for regulation 9(1), the details of these provisions are not relevant to what we have to decide. Regulation 9(1) provided that:-

"(1) A contractor shall be regarded as a health service body … from the date that it makes an agreement unless—(a) in the case of an agreement with a single individual or qualifying body, that individual or body; … objects in a written notice served on the relevant body at any time prior to the agreement being made".

26. Regulation 10 of the PMS Regulations 2004 provided that: "[i]f the contractor is to be regarded as a health service body, the agreement must state that the agreement is an NHS contract". The Pitalias place great reliance on this provision.

The Pitalia's grounds of appeal

27. The Pitalias' grounds of appeal included as grounds 3-5 that Stuart-Smith J was wrong to conclude that:-

i) the Pitalias had agreed a term in the PMS variation agreement to be regarded as a health service body;

ii) the PMS variation agreement stated that the Pitalias were to be regarded as a health service body; and

iii) the PMS variation agreement did not need to be compliant with the PMS Regulations 2004.

28. In argument, Mr Simon Butler, counsel for the Pitalias, put the matter as follows:-

i) Article 59(1) of the PMS Transitional Order 2004 required the parties to enter into discussions with a view to agreeing variations to the PMS transitional agreement so that it complied with the PMS Regulations 2004, and article 59(6) provided that the parties could not agree any variation that was contrary to the PMS Regulations 2004.

ii) Regulation 9 of the PMS Regulations 2004 provided that it was up to the Pitalias to decide if they wished to be a health service body and, by so agreeing, to enter into an NHS contract, and the Pitalias never decided that they did, even though they never, before 2012, requested any variation or objected to being treated as such under regulation 9.

iii) Had the PMS variation agreement stated that it was an NHS contract in accordance with regulation 10 of the PMS Regulations 2004, the Pitalias could have referred the matter to the Secretary of State for consideration and determination under regulation 8.

iv) The judge ought in any event to have decided whether the PMS variation agreement was an NHS contract, because if it was not, there was no binding dispute resolution clause on any analysis.

Was the PMS variation agreement an NHS contract?

29. DJ Relph's reasoning on this point was, in outline, that the PMS pilot agreement as varied by the PMS variation agreement was an NHS contract, even though it did not state that it was an NHS contract, because:-

i) The Pitalias never (actually until 2012 – after the hearing before DJ Relph) served a notice in accordance with regulation 9 of the PMS Regulations 2004 objecting to being regarded as a health service body or requiring a variation to the PMS variation agreement; and

ii) The Pitalias were stated to be a health service body in the PMS pilot agreement and, therefore, remained one after the PMS variation agreement.

30. In my judgment, the starting point is the provisions of the PMS pilot agreement. Plainly, because that agreement expressly provided for the Pitalias' status as a health service body, the provisions of section 9(1) of the NHSA 2006 were satisfied and the PMS pilot agreement was an NHS contract.
31. On 1^st April 2004, the PMS pilot agreement became the PMS transitional agreement. Mr Butler submitted, in effect, that all the terms of the PMS pilot agreement were effectively abrogated at that stage and were replaced by the terms specified in the PMS Regulations 2004. I do not think that was the effect of articles 1 and 58-69 of the PMS Transitional Order 2004.
32. Article 58 of the PMS Transitional Order expressly provides that "[a]ny pilot scheme under which personal medical services were being provided on 31st March 2004 shall, on the … abolition of pilot schemes … be deemed to have been made under section 28C of the 1977 Act and accordingly shall not cease to have effect …". The PMS pilot agreement was a pilot scheme (see article 60(2)(i) of the PMS Transitional Order 2004). Therefore, it continued in effect after 1^st April 2004. None of the specific terms mentioned in article 60 of the PMS Transitional Order 2004 are relevant to whether or not the PMS transitional agreement was an NHS contract.
33. The parties in this case negotiated for a variation to the PMS transitional agreement pursuant to article 59(1) of the PMS Transitional Order 2004, and concluded those negotiations on 27^th April 2004 when they entered into the PMS variation agreement, which provided that the PMS pilot (i.e. the PMS pilot agreement) should become permanent. In my judgment, this provision had the effect of continuing, contractually at least, the provisions of the PMS pilot agreement, into the PMS variation agreement. One of the most important provisions of the PMS pilot agreement was that the Pitalias were to be regarded as being a health service body.
34. At this point, Mr Butler points to Regulation 10 of the PMS Regulations 2004, which provides that any new agreement "must state that [it is] an NHS contract". It did not do so, so Mr Butler argues, it cannot have been one. But this overlooks the provisions of article 68(1) of the PMS Transitional Order 2004 that provides expressly that "a contractor … which was, on 31st March 2004 a health service body … shall be regarded as such a body after that date …". The subsequent reference to the application of regulation 9 of the PMS Regulations 2004 only provides that it shall "apply as if health service body status had been conferred on that contractor under that regulation", and does not detract from the effect of the primary provision. Mr Butler's argument also overlooks the effect of regulation 9 of the PMS Regulations 2004, which provides, in effect, that a health service body remains one until it objects by written notice.
35. Thus, one reaches the position that both contractually and statutorily, the Pitalias' health service body status carried over from the PMS pilot agreement, through the PMS transitional agreement, and into the PMS variation agreement, unless regulation 10 of the PMS Regulations 2004 has a contrary effect. In my judgment it cannot do so. Regulation 10 certainly provided that the PMS variation agreement ought to have stated that it was an NHS contract if it was such. And article 59(6) certainly provided that the parties "may not agree … any variation … that would be contrary to" the PMS Regulations 2004. But the provision that the Pitalias were a health service body is not in any sense contrary to the PMS Regulations 2004. Regulation 10 says that the agreement shall state that it is an NHS contract. The PMS pilot agreement did so, and the term of the PMS pilot agreement relating to the Pitalias' health service body status carried through both contractually and statutorily to the PMS variation agreement. The PMS variation agreement had no need itself to mention the Pitalias' status, since the PMS pilot agreement had already done so, and it was that that was being amended by the PMS variation agreement. Interestingly, the parties made that expressly apparent when they entered into the 2012 PMS variation agreement, which amended the PMS pilot agreement, not the PMS variation agreement.
36. Even if there were a breach of regulation 10 of the PMS Regulations, which I do not think there was, it cannot, in my judgment, have the consequence that Mr Butler suggests. If it did, it would fly in the face of the express provisions of article 68(1) of the PMS Transitional Order 2004 and of section 9 of the NHSA 2006. A breach of regulation 10 cannot possibly have that effect, particularly when it does not provide expressly for any consequence of its breach.
37. For these reasons, it seems to me that DJ Relph was right to hold that the PMS pilot agreement as varied by the PMS variation agreement was an NHS contract. If that is right, the Pitalias had no legally enforceable contractual rights against the CLPCT when they issued these proceedings in March 2010 because of the provisions of section 9(5) of the NHSA 2006. In the circumstances, the Pitalias cannot, in my judgment, have any right to relief against the CLPCT and the claim ought to be struck out.
38. This conclusion is contrary to the decision that was reached by DJ Relph, who, as I have said, stayed the proceedings under section 9(1) of the AA 1996. I turn then to deal with the second question before us, namely whether the CLPCT should be permitted at this late stage to amend its application notice for a stay to seek a strike out.

Should the CLPCT be permitted to amend its application notice to seek a strike out of the Pitalias' claim?

39. The argument on this point revolved around the question of whether the Pitalias would be prejudiced by allowing the CLPCT to amend so late in the day. Mr Butler argued that the Pitalias would be prejudiced because they would not be able to apply to the High Court for the stay to be lifted now that they have entered into the 2012 PMS variation agreement to change the status of their contractual arrangements into a non-NHS contract. Mr Butler was concerned that the Pitalias will have missed the opportunity to make a reference for a determination to the Secretary of State in relation to their claims prior to March 2012.
40. It seems to me that the Pitalias cannot be prejudiced by the amendment sought for one simple reason. They never had any legally enforceable rights under the PMS variation agreement, either when they issued these proceedings or thereafter. It is true that they may now have some legally enforceable rights after the 1^st December 2012 arising as a result of the change of status in the 2012 PMS variation agreement, but those can be vindicated in fresh proceedings. No limitation period will have expired in relation to their post-1^st December 2012 rights. As for the Pitalias' pre-1^st December 2012 rights, they could never have vindicated those in these legal proceedings, and the fact that they may have a problem now doing so (as to which we say nothing since the matter was not fully argued) is nothing to the point in these proceedings.
41. Just before a draft of this judgment was due to be handed down to counsel in the usual way, Mr Butler put in a lengthy written submission raising additional grounds for opposing the amendment to the application notice relying on CPR Part 11 (disputing the court's jurisdiction) and Part 3.9 (relief from sanctions). Neither provision is relevant. The application to strike out is not a jurisdictional challenge; it is on the basis that an NHS contract cannot give rise to contractual rights or liabilities under section 9(5) of the NHSA 2006, so that the Pitalias can have no cause of action. Nor is the CLPCT applying for relief from sanctions. It is applying late under CPR Part 3.4 to strike out the claim. It seeks permission to amend its previous application for a stay under the court's general management powers in CPR Part 3.1(2)(m). Mr Butler suggested also that permission to amend should be refused because the Pitalias are no longer a health service body, so that there may be some conflict between an adjudicator determining matters before 1^st December 2012, and the court determining matters afterwards. I do not think that can be any reason not to permit the CLPCT to amend its application so as to apply to strike out proceedings that relate to a period in respect of which there can be no cause of action.
42. For the reasons I have given, it seems to me that it is appropriate to allow the CLPCT to amend its application notice in the way that it seeks to do to apply for a strike out of these proceedings.

Disposal

43. I would, therefore, hold that the PMS pilot agreement as varied by the PMS variation agreement was an NHS contract until 1^st December 2012, and that the Pitalias had no legally enforceable rights against the CLPCT arising under it before that date. The CLPCT should be permitted to amend its application notice to apply for a strike out of these proceedings, and the proceedings should be struck out, rather than stayed as DJ Relph and Stuart-Smith J ordered.
44. In the result, therefore, there is no need for the remaining questions as to the nature and effect of the dispute resolution provisions in either the PMS pilot agreement or regulations 93-97 of the PMS Regulations 2004 to be determined. I should not, however, despite the fact that the arbitration questions were not directly before the court, be taken as approving DJ Relph's findings as to the nature and legal effect of the dispute resolution provisions that she was considering.

Lord Justice Patten:

45. I agree.

Lord Justice Aikens:

46. I also agree with Vos LJ's conclusion that the PMS pilot agreement as varied by the PMS variation agreement was an "NHS contract", for the reasons that he gives. It must follow that the effect of section 9(5) of the NHSA 2006 (and its predecessor provision) is that the Pitalias had no legally enforceable contractual rights against the CLPCT or its successor body when they issued the current proceedings. The logical consequence of that conclusion is that these proceedings ought to be struck out under CPR Pt 3.4(2), either on the ground that they disclose no reasonable ground for bringing the claim or on the ground that they are an abuse of the court's process. Mr Lock's proposed amendment to CLPCT's original application (which, although mentioning CPR Pt 3, effectively only sought a stay on the grounds that there was a matter which the parties had agreed to refer to arbitration within the meaning of section 9 of the AA 1996), seeks to strike out the Pitalia's claim on the ground that it discloses no cause of action against CLPCT or its successor body, the NHSCB.
47. I agree with Vos LJ's conclusion that the respondent should be permitted to make this amendment to its original application, even at this very late stage of these proceedings and even though it was only as a result of pressing by the court that Mr Lock made his application at all. The Pitalias have not been prejudiced by this late application, for the reasons that Vos LJ has given.
48. The consequence of these conclusions is that we do not need to consider the points dealt with in Stuart-Smith J's judgment. Nor do we need to consider whether the dispute resolution provisions in clause 5.6.2 and Schedule 3 of the PMS Pilot agreement create an "arbitration agreement" within the meaning of section 6 of the AA 1996, that would enable a party to such an agreement to apply for a stay under section 9(1) of that Act. I appreciate that this matter was not dealt with by Stuart-Smith J, because he concluded that he did not need to deal with DJ Relph's conclusion on this point, although Stuart-Smith J seems to have assumed that there was a valid arbitration agreement that could be stayed under section 9(1) of the AA 1996.
49. I need only say that I am very far convinced that these dispute resolution provisions give rise to an "arbitration agreement" for the purposes of the AA 1996. Moreover, even if that point were otherwise arguable, it is clear that the PMS variation contract, being an NHS contract, "must not be regarded for any purpose as giving rise to contractual rights or liabilities" pursuant to section 9(5) of the NHSA 2006. So it seems to me that the PMS pilot agreement, which became the PMS variation agreement could not give rise to any "arbitration" rights, even if "arbitration" provisions are normally to be treated as severable from the remainder of a "contract", in accordance with section 7 of the AA 1996. The effect of section 9(5) of the NHSA 2006 is absolutely clear, by its use of the words "must not be regarded for any purpose…", so that there could not be any enforceable rights to arbitration, which rests on the parties' agreement.