England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT at LEEDS

		The Court House 1 Oxford Row, Leeds, LS1 3BG
		15 February 2013

Mr Justice Supperstone :

Introduction

1. The Claimants are the members of the committee of Care North East Northumberland ("CNEN"), which is an unincorporated association whose members own and/or operate nursing homes and/or care homes in the North East of England and in particular in the area of Northumberland.
2. The Defendant, Northumberland County Council ("the Council") is the local authority which has statutory duties to provide accommodation and social care services under various statutes including the National Assistance Act 1948.
3. The Interested Party, Northumberland Care Trust ("the Trust"), is an NHS Primary Care Trust created or continued under section 18 of the National Health Service Act 2006. The Trust enters into arrangements and places contracts on behalf of itself and on behalf of the Council with health and/or social care providers for health and/or social care services that the National Health Service and/or the Council are either required to provide or have power to provide under various statutes for adults in Northumberland.
4. In this claim for judicial review the Claimants challenge two decisions made by the Defendant on 12 or 13, alternatively 27, March 2012 to fix care home rates in the Northumberland area for the period of three years from 1 April 2012 to 31 March 2015.

The legislative framework

5. The Defendant has an obligation under section 21(1)(a) of the National Assistance Act 1948 (the "1948 Act") to provide residential accommodation to those adults in its area who, by reason of age, illness, disability or any other circumstances, are in need of care and attention which is not otherwise available to them. By section 26(1) of the 1948 Act a local authority may discharge its duty under section 21 by contracting with a private care home provider who operates for profit. The care home will provide the accommodation in exchange for fees paid to it by the authority, agreed between the parties.
6. In discharging its duty to provide accommodation, a local authority is required to act in accordance with such directions as may be given by the Secretary of State under section 7A(1) of the Local Authority Social Services Act 1970 (the "1970 Act"). The National Assistance Act 1948 (Choice of Accommodation) Directions 1992 (the "Directions") provide that where a local authority have assessed a person under section 47 of the National Health Service and Community Care Act 1990 and have decided that accommodation should be provided pursuant to section 21 of the 1948 Act, the local authority shall, subject to paragraph 3 of the Directions, make arrangements for accommodation for that person at a place of his choice within the UK (called "preferred accommodation") if he has indicated that he wishes to be accommodated in preferred accommodation. Paragraph 3 of the Directions states, in so far as is material, that the local authority shall only be required to make or continue to make arrangements for a person to be accommodated in his preferred accommodation if:

"(b) the cost of making arrangements for him at his preferred accommodation would not require the authority to pay more than they would usually expect to pay having regard to his assessed needs."

7. Section 7 of the 1970 Act provides that:

"(1) Local authorities shall, in the exercise of their social services functions, including the exercise of any discretion conferred by any relevant enactment, act under the general guidance of the Secretary of State."

8. Under section 7(1) the Secretary of State has issued formal statutory guidance in Local Authority Circular LAC (2004) 20 ("the Circular"). Paragraph 2.5.4 of the Circular states as follows:

"One of the conditions associated with the provision of preferred accommodation is that such accommodation should not require the council to pay more than they would usually expect to pay, having regard to assessed needs (the 'usual cost'). This cost should be set by councils at the start of a financial or other planning period, or in response to significant changes in the cost of providing care, to be sufficient to meet the assessed care needs of supported residents in residential accommodation. A council should set more than one usual cost where the cost of providing residential accommodation to specific groups is different. In setting and reviewing their usual costs, councils should have due regard to the actual costs of providing care and other local factors. Councils should also have due regard to Best Value requirements under the Local Government Act 1999."

9. Paragraph 3.3 provides:

"When setting its usual cost(s) a council should be able to demonstrate that this cost is sufficient to allow it to meet assessed care needs and to provide residents with the level of care services that they could reasonably expect to receive if the possibility of resident and third party contributions did not exist."

10. Separately from the formal statutory guidance, in October 2001 the Department of Health had issued what was described as "an Agreement between the statutory and the independent social care, health care and housing sectors", entitled "Building Capacity and Partnership in Care" ("Building Capacity"). Paragraph 6.2 of Building Capacity states:

"Providers have become increasingly concerned that some commissioners have used their dominant position to drive down or hold down fees to a level that recognises neither the costs to providers nor the inevitable reduction in the quality of service provision that follows. This is short-sighted and may put individuals at risk. It is in conflict with the Government's Best Value policy. And it can destabilise the system, causing unplanned exits from the market. Fee setting must take into account the legitimate current and future costs faced by providers as well as the factors that affect those costs, and the potential for improved performance and more cost-effective ways of working. Contract prices should not be set mechanistically but should have regard to providers' costs and efficiencies, and planned outcomes for people using services, including patients."

The factual background

11. Mr Hunter, who is Chair of CNEN and also Managing Director of Sovereign Care (North East) Limited which owns four care homes in the north east of England, sets out in his first witness statement made in these proceedings the consultation process that was conducted by the Defendant in relation to the new contract that would be effective from 1 April 2012. At paragraph 8 he states:

"The providers were very keen to explain to the Council that we were committed to delivering a quality service to the residents in our care homes. The Council set high quality standards and we wanted to ensure that the service provided to vulnerable people was as good as it could be. However, these high quality services are expensive to deliver and we are facing substantial, rising costs. We therefore saw the consultation period as the opportunity to explain to the Council that, if they shared our agenda for the delivery of high quality services, they needed to set fee levels which met the costs of providing those services."

12. The first meeting that Mr Hunter had with the Defendant was on 11 October 2011. There was a further meeting between the Claimants and the Council on 9 November 2011. No formal proposals were put forward at these meetings. At a meeting on 1 December 2011 the Defendant presented CNEN with two proposals for consideration. The first involved a three year contract in which the then current "inflator" (2.16%) would be applied in each of the years but this would be offset by "efficiencies" of 3%, 1.5% and 0% in the first to third years of the contract in Grades 1-3 homes. The second involved placing all homes on the current Grade 4 rates, applying the 2.16% inflator in each of the three years and allowing for a 1% "quality bonus".
13. Mr Hunter comments that the costs of running a Grade 1 home are significantly more than the costs associated with a Grade 4 home. The Option 2 proposal would have meant that the rate for a Grade 1 home would have reduced from £466 to £419, a reduction of 10%. Grade 2 and Grade 3 rates would have reduced by 9% and 7% respectively.
14. Ms Bowie, the Defendant's Associate Director of Strategic Commissioning and Safeguarding in the Adult Services and Housing/Community Services Business Unit, stated at the meeting on 1 December 2011 that the two proposals were put on the table to open up discussion (see Minutes of meeting, C65-67).
15. On 15 December 2011 there was a further meeting attended by Ms Bowie, together with Mr Bradley, the Defendant's Head of Finance in the Community Services Business Unit, and the Claimants (Minutes at C68-72). The next meeting was on 3 January 2012 (Minutes at C77-78). Ms Bowie states in her witness statement at paragraph 68 that at that meeting she:

"queried whether the Claimants had any proposals they wished to put forward. Unfortunately, the Claimants were not forthcoming with any information that might help develop the consultation process and stated that it was not for them to come up with proposals. Reference was made by one of the Claimants, Mr Hunter, to re-running the PWC Model [that was a costing model produced by the accountants, Price Waterhouse Coopers, that had been used for the 2005 Contract]. I was trying to encourage the Claimants to engage in the process of contract negotiation, which they were refusing to do. I therefore asked Mr Hunter if any providers represented by the Claimants could provide any evidence as to why care home fees in Northumberland should be higher than other areas regionally and nationally. I stated that care was being provided in these other areas for significantly lower fees and accordingly it was not clear why Northumberland were paying more for care. Mr Hunter stated that he would consider the issue. Apart from discussions with Mr McArdle referred to at paragraph 108 below, neither Mr Hunter nor any of the Claimants, ever came back to us in relation to the costs that they allege are higher in Northumberland."

16. Mr McArdle is Managing Director of Helen McArdle Care Limited and a committee member of CNEN. His company operates fourteen care homes throughout the north east of England. The discussions that Ms Bowie refers to at paragraph 108 of her statement were between Mr Bradley and Mr McArdle on 18 April 2012, following which Mr Bradley informed her that the only specific local difference in running costs which Mr McArdle had identified in Northumberland related to high staffing costs in one of his three care homes in the county. It appeared to Mr Bradley that those high staffing costs were as a result of the use of agency staff, which Mr McArdle had confirmed were used. (See also para 43 below).
17. On 17 January 2012 the Council met with the Claimants again (Minutes at C109-111). Following that meeting, on 26 January 2012, Mr Hunter sent Ms Bowie an e-mail (C112-114) in which he proposed the following:

"1. that we re-run the TOC [sic] [that is the PWC] model (which I believe has not been run since 2004)

or

2. that we continue with the inflator as it is but over the next two years—we then use the next two years to re-run the model which gives us the opportunity to use the data from that in order to identify both efficient and inefficient costs which can then be reviewed jointly."

18. At a meeting which took place on 21 February 2012 between the Defendant and the Claimants, Ms Bowie explained that the Council had considered the proposal to run the PWC model but that it was not willing to do so. The minutes of the meeting (C210-213) note:

"3. Response to CNEN Position

JB [Ms Bowie] confirmed that Neil Bradley (NB) had re-looked at the model – NB stated it had flaws:

CNEN as providers feed into the model without challenge and against no significant regional or national benchmark information;

As the model inherently builds in a profit, it creates a potentially risk-free environment for potential investors. This creates additional capacity within the market whether or not it is required forcing down occupancy levels. This effect will further inflate costs on each review of the model."

The minutes continued:

"…MCA [Mr McArdle] asked if CNEN could have a response to option 2 on their e-mail and if there were some elements in that could be agreed upon. JB read option 2 as accepting re-running the model but deferring that for two years so wouldn't be agreeable.

…

4. Next Steps

It was agreed that JB would look at CNEN's option 2 but without the re-run of the PWC model and come back with response at the meeting on 28 February."

19. Ms Bowie and Mr Bradley did consider option 2 further. However they considered that "in essence, this was just another way of attempting to commit the Council to re-run the PWC Model, albeit not right away, but for the purpose of setting future contract fees. The Council were not willing to do this, …" (Ms Bowie's witness statement at para 72).
20. In her witness statement Ms Bowie details the separate discussions that the Defendant had with providers other than the Claimants in relation to the new contract. The largest of these providers is Four Seasons Health Care ("FSHC"). There are two other providers, namely Bondcare and HC1. FSHC, Bondcare and HC1 represent 33% of beds in Northumberland. The four members of the CNEN committee who are the Claimants represent homes accounting for around 10.5% of the beds in Northumberland (see paras 47, 79-94).
21. On 12 March 2012 Ms Bowie wrote to all the care home providers setting out the current position:

"… The underlying situation which I am sure you will understand, is that all public sector organisations are required to make substantial reductions in their expenditure because of the economic situation and the Government's policy on reducing the national deficit. …

… We know from comparisons with other areas that care home fees paid by the Council in Northumberland remain higher than those paid in most neighbouring areas. Indeed we have some reason to think that fees paid in Northumberland may in some cases be cross-subsidising care homes in other areas operated by the same provider.

It is therefore our view that, while we need to take account of increases in the costs of running a care home, we can also reasonably expect care home providers to make some reductions in their costs. We have been asked by CNEN to provide specific justifications of percentage figures which we have suggested – but in a situation which involves many variables, we do not believe that it is feasible to base figures on a precise calculation; we have therefore been seeking to negotiate with CNEN, and separately with providers which have chosen not to be represented by CNEN, about what level and pace of cost reduction is reasonable. We have also invited CNEN and providers who operate homes in other areas to provide us with any evidence they may have about higher costs of operating care homes in Northumberland compared to neighbouring areas. We have not yet received evidence on this point.

At the time of sending out this letter we have reached agreement with care home providers representing over 20% of the total care home places for older people in the County. We think that this provides evidence that it will be possible to meet the needs of those people who require care home accommodation whilst restraining overall costs to public funding.

…

The 'true cost of care' and 2001 Government advice

…

In the years following the issue of Building Capacity, a number of local authorities, including Northumberland, interpreted this advice as meaning that the fees they paid to care homes should ordinarily be based on a modelling exercise of the kind which PriceWaterhouseCoopers carried out in Northumberland in 2004, aiming to set fees at a level which, on the basis of information from care home owners, would cover all costs and normal profit margins.

In Northumberland and elsewhere, these modelling exercises generally led to substantial increases in fees, with no clear evidence of improved quality.

Other local authorities adopted a narrower interpretation of the requirements of Building Capacity, or took a more sceptical view about the validity of the available modelling tools, and continued to offer lower levels of fees, in line with common practice before 2001. We are not aware of any evidence that these authorities faced serious difficulties with care home viability or quality as a result.

…

The current status of Building Capacity

…

The Council … believes that this document reflects the position at a particular time, when circumstances and national policy were different.

…

The Council's view is therefore that Building Capacity is advice issued at a time when both policy and public sector finances were different, and that, while it still has some value as a source of advice, it is now reasonable to depart from its advice, or at least from the way in which the County Council and others interpreted that advice in the last decade.

The issues which the Council will consider

In preparing the options which it offers to care home owners, and in assessing proposals from care home owners, the Council is taking into account a number of considerations:

The Council needs to make substantial savings in its budget over the next three years.

…

Both the specific 'true cost of care' model used in Northumberland in 2004, and what we know of models used elsewhere, produces results which do not appear to be in line with the actual functioning of the market – fees below the levels generated by these models appear to be adequate to maintain capacity, and the current level of fees in Northumberland appears to have supported the development of excess capacity. We believe that the models in use are flawed – we have raised this issue with PriceWaterhouseCoopers, on the basis of our experience of their model – and that there are practical difficulties in arriving at an objective picture of costs in a situation where strong commercial interests are at stake. We also think that some care home providers have managed to negotiate both that local authorities should pay the 'true cost' and that they should continue to have the right to charge fees above this figure to private payers.

Some provider costs are increasing, but this is a context of a relatively high level of fees in Northumberland, and there is scope for cost reductions to offset these increases.

There is evidence that has been brought to our attention that there is excess capacity in Northumberland, and since it is our objective to become better at supporting older people to remain independent in their own homes, there is no reason to think that additional capacity will be needed in the next three years, and we need to be prepared to accept that some homes may have to diversify what they offer, or close.

...

Overall, the Council's aim is to achieve the required savings while minimising the impact on disabled people – and where possible making changes in ways which further promote disabled people's independence. We will continue to listen to and consider all representations made by providers, but our current view is that good quality services can be provided to care home residents at lower cost than current fee levels in Northumberland.

I have enclosed a copy of the new contract and details of new fee rate on which we have been able to reach agreement with a group of providers in Northumberland. I would very much welcome other care homes signing up now as well… as this would help avoid any uncertainty for residents and their families.

I hope this full explanation of our position is helpful. If you have queries or comments about any points, please contact me, either directly or through CNEN or any other organisation that you wish to be represented by."

22. By e-mail on 12 March 2012 Ms Bowie contacted the Claimants and proposed a meeting with them for the following week. Her evidence is that she was keen to discuss the proposals that had been agreed with FSHC and to see whether further progress could be made (witness statement, para 99). On 14 March 2012 she received an e-mail from Mr Hunter asking for clarification of two points in relation to the proposals, to which she responded. On 16 March 2012 she received an e-mail from Mr Hunter enclosing a letter (C327) which stated:

"Further to the CNEN meeting held on 15.3.12 where the new contract (2012-2015) was reviewed.

There was a unanimous agreement that the fee proposal contained within the summary and contract was unacceptable and the providers have agreed to instruct legal advisers to review both.

They did not accept the argument or premise put forward in your letter, and I believe that further direct discussions with the local authority will prove unfruitful until this review is undertaken."

23. On 27 March 2012 Ms Bowie wrote a further letter to all care home providers in Northumberland providing a further update in relation to contract negotiations:

"As you know, I wrote to you last week enclosing a copy of the new contract which we propose to introduce with effect from 1 April 2012, and explaining the reasoning behind its terms. I am able to say that we have now received signed contracts back from a further 9 care homes and are expecting signed contracts from an additional 11 care homes who have verbally confirmed acceptance of the offer, which would account in total for just over 40% of registered places for older people in the county.

…

As things stand, however, I need to be clear that, with effect from 1 April, the new contract which we have circulated to you represents our usual terms and conditions for making placements, and we do not expect to make new placements in Northumberland outside the terms of this contract. If you have not already done so, but intend to sign up to the new contract, I would be grateful if you could confirm that as soon as you are able as we will be taking steps to inform care managers about which homes we are commissioning with shortly."

24. Thereafter on 16 April 2012 the Council met further with the Claimants (minutes at C428-430) (by which time more than 70% of placements in Northumberland had signed up to the contract terms proposed) and during the remainder of April and May 2012 discussions continued between the Council and Mr McArdle. At the meeting on 18 April 2012 Mr McArdle produced a set of management accounts. On 20 April 2012 Ms Bowie wrote to Mr Hunter (C433-434):

"Following our meeting on Monday, we did take Mark [McArdle] up on his offer to show us information about differences in costs between Northumberland care homes and homes in other areas and to consider the new proposal made by the CNEN Committee, based on extending the inflation provisions of the existing contract over the period from 2012 to 2015, with no commitment to re-run the PriceWaterhouseCoopers 'true cost of care' model.

Neil Bradley met with Mark on Wednesday morning. Neil's conclusion from the information which Mark showed him was that the only specific local difference in running costs that was apparent was that one of Helen McArdle's three homes in the county had unusually high staffing costs. These costs appeared to be associated with high use of agency staff. Surprisingly, the home concerned was not in one of the areas where, on the basis of our knowledge of the local labour market, we would expect recruitment to be more difficult – and indeed was not in one of the areas which we would expect to raise issues specific to Northumberland. Other cost and profitability differences between homes appeared to be associated with specific factors not related to the local authority area in which homes are located.

Our position, then, remains that we have not been presented with any convincing evidence that operating a care home in Northumberland is more expensive than doing so in other local authority areas in the North East. Taking this together with the other considerations mentioned in our letter to all care homes of 13 March, it remains our view that the contractual terms which have now been accepted by more than 70% of care homes in the County are reasonable. (Further homes have signed up since we met – updated statistics are attached)."

Mr McArdle replied to this e-mail on 24 April 2012 (C437-441), which led to a detailed letter in reply from Ms Bowie dated 30 April 2012 (C448-457). There was further correspondence between Ms Bowie and Mr McArdle during May 2012.

The issues

25. There are four grounds of challenge. Ms Aileen McColgan, for the Claimants, submits

i) That the Defendant failed to comply with its duties of consultation (Ground 1).

ii) That the Defendant had failed to inform itself of the costs to care home operators of providing services before setting its rates (the "usual cost"), and so acted contrary to the relevant guidance by:

a) failing to have regard to the actual costs of providing care, contrary to the Circular;

b) placing itself in a position such that it is unable to demonstrate that its "usual cost" for the purposes of paragraph 3(b) of the Directions is "sufficient to allow it to meet assessed care needs and to provide residents with the level of care services that they could reasonably expect to receive if the possibility of resident and third party contributions did not exist", contrary to the Circular, para 3.3; and

c) failing to take into account, in setting fees, of "the legitimate current and future costs faced by providers as well as the factors that affect those costs", contrary to Building Capacity, para 6.2. (Ground 2).

iii) That the Defendant acted irrationally and/or failed to take into account relevant considerations in that it:

a) imposed "efficiency savings" on care home providers in respect of Care Homes in Bands 1-3 without making any assessment of how those efficiency savings might be generated;

b) assumed (if and to the extent that it purported to take account of the actual costs of care in setting care home fees) that any inflationary rises in the cost of care would be off-set by these "efficiencies", which were set at 0.5% in the first and second years of the contract, during which the inflationary uplift for Band 1 homes was also set at 0.5% (thus cancelling each other out); and

c) provided no inflationary uplift in the case of Band 2-4 homes notwithstanding the inevitability of inflationary increases in costs over the three years of the contract. (Ground 3).

iv) That, by refusing to make new placements with care home providers who have not signed the contract terms issued in March 2012, the Defendant has abused its dominant position in the market and acted contrary to paragraph 3 of the Directions and the Circular. (Ground 4).

26. It became clear during the course of oral submissions made by Ms McColgan and Mr Nigel Giffin QC, for the Defendant, that the principal issue in this case is whether the Defendant failed to have "due regard to the actual costs of providing care", contrary to the Circular. I shall accordingly consider Ground 2 first.

Ground 2: allegation that the Council "acted contrary to the relevant guidance"

27. Ms McColgan submits that the Circular, statutory guidance, required the Defendant to pay "due regard" to the actual cost of care provision in setting their "usual cost". In the absence of any understanding of that actual cost, she submits, the Defendant cannot claim to have had due (or indeed any) regard to it as required by the Circular.
28. It is not the Claimants' case that the Council was bound to follow the PWC model or indeed any model. However it is said that the Defendant was bound to adopt some means of determining the actual costs of care in order to put itself in a position to pay due regard to those costs. In her oral submissions in reply Ms McColgan suggested that the Council could have informed itself of the costs of care by conducting a survey of a sample of providers as to the level of occupancy of beds, staffing costs, food costs, maintenance costs and other relevant matters. Such a survey, she suggested, would have enabled the Defendant to reach some figure as to the costs of care, which it was required to do.
29. In support of this submission Ms McColgan relies upon the recent decision in R (on the application of Redcar and Cleveland Independent Providers Association and others) v Redcar and Cleveland Borough Council [2013] EWHC 4 (Admin). HH Judge Gosnell said at para 56:

"In my view, in order to have due regard to the actual costs of providing care it is necessary first to determine what that cost currently is, even if only a broad estimate or bracket is calculable."

30. Ms McColgan submits that the Defendant erred in setting the fees from 2012 on the basis of a benchmarking exercise by which it decided that the fees were relatively high in Northumberland by comparison with those of other local authorities and imposed a three-year contract designed to reduce in real terms the fees paid in respect of care home provision in Northumberland without reference to considerations of actual costs. Benchmarking, she submits, is an inadequate starting point for the determination of actual costs. Some or all of the Councils against whose "usual costs" the Defendant was comparing its own may have been under-paying care home providers. The Defendant assumed from the fact that care homes in other regions did not appear to be going out of business, that the fees paid elsewhere were sufficient. Further the Defendant's approach to benchmarking was selective, no regard being had to the fact that Northumberland rates for EMI care were far from the highest in the North East. Moreover the Defendant overlooked the fact that the relative proportion of Band 3 and 4 Homes had increased at the expense of Band 2 Homes over the period October 2009 to December 2011 (rising from 10.2% of the total to 28.2% of the total), while fees had fallen in relative terms.
31. Ms McColgan notes there is no reference to the Guidance in the Defendant's contemporaneous documentation. The Defendant's evidence, she suggests, indicates that the Defendant failed to appreciate the obligations imposed by the statutory guidance on decision-makers in the present context.
32. Mr Giffin submits that the way in which the Defendant reached its decision does amount to having due regard to the actual cost of care; alternatively, to the extent that what the Council has done does involve departure from the guidance, it acted lawfully.
33. The Council's legal obligations in relation to the Circular are, in my view, clear. The Circular is statutory guidance issued under s.7 of the 1970 Act. By s.7(1) local authorities exercising their social services functions are required to:

"…act under the general guidance of the Secretary of State." (See para 7 above).

In R v Islington LBC ex p Rixon (1998) 1 CCLR 119 at 123 Sedley J said:

"Clearly guidance is less than direction, and the word 'general' emphasises the non-prescriptive nature of what is envisaged… In my judgment Parliament… did not intend local authorities to whom ministerial guidance was given to be free, having considered it, to take it or leave it. Such a construction would put this kind of statutory guidance on a par with the many forms of non-statutory guidance issued by departments of state. … in my view Parliament by section 7(1) has required local authorities to follow the path charted by the Secretary of State's guidance, with liberty to deviate from it where the local authority judges on admissible grounds that there is good reason to do so, but without freedom to take a substantially different course."

34. In R (Forest Care Home Ltd) v Pembrokeshire CC (2011) 14 CCLR 103 at [29] Hickinbottom J suggested that, since the local authority is the ultimate decision maker, it must as a matter of principle be able to depart from guidance even substantially if it had sufficiently compelling grounds for so doing. However, the more the proposed deviation from guidance, the more compelling must be the grounds for departure from it.
35. The purpose of the guidance in the Circular is summarised in the accompanying letter:

"This guidance sets out what individuals should be able to expect from the council that is responsible for funding their care, subject to the individual's means, when arranging a care home place for them. This guidance is intended to describe the minimum of choice that councils should offer individuals."

Mr Giffin observes that the Circular is accordingly directed towards what local authorities have to do for individuals in need of residential care; it is not about the relationship between authorities and care home providers such as the Claimants. Mr Giffin suggests that the characterisation of the guidance in the covering letter is borne out by its contents. Paragraph 2.5 states that a council must arrange for care in an individual's preferred accommodation subject to four considerations. One of these considerations is cost which is dealt with in paragraphs 2.5.4-2.5.8. Paragraph 2.5.4 (see para 8 above) states that preferred accommodation should not require the council to pay more than they would usually expect to pay, having regard to assessed needs (the "usual cost"). That usual cost should be set at appropriate times, and there may be a need for different usual costs for different groups. The single sentence in paragraph 2.5.4 upon which the Claimants rely reads as follows:

"In setting and reviewing their usual costs, councils should have due regard to the actual costs of providing care and other local factors."

36. That sentence must be read in its context. Mr Giffin submits, and I agree, that as such it means no more than that, when determining what they are usually prepared to pay for residential care, authorities should bear in mind, amongst other matters, the providers' need to recover their costs. Usual fee rates should not be set by authorities without any consideration being had to the question of whether it is viable to provide care at those rates. However, even if "having due regard to the actual costs of providing care" should be understood as requiring a more specific consideration of actual costs, the Circular does not require authorities to calculate or ascertain the actual cost of care.
37. Mr Giffin referred to the decision in R (South West Care Homes Ltd) v Devon County Council [2012] EWHC 1867 (Admin) in support of this submission. Two preliminary points made by Singh J in that case at paragraphs 24 and 25 are noted by Mr Giffin. First, provided that which it is legally relevant for the decision maker to know is brought to its attention, it is generally for the decision maker to decide upon the manner and intensity of the inquiry to be undertaken into any relevant factor (see R (on the application of Bevan and Clark LLP and Ors) v Neath Port Talbot BC [2012] EWHC 236 (Admin), at paragraph 56 (Beatson J)). Second, the weight to be given to a relevant factor is for the decision maker and not for the court in the absence of irrationality. Turning to the facts of the case, Singh J expressed himself satisfied on the evidence before the court that the defendant did have due regard to the actual costs of providing care. Mr Giffin submits that what that case (see paras 27-33 of the judgment) and the present case have in common is that the authority took account of actual care costs, not by an exercise in precise quantification, but by exercising its judgment and experience in the light of how the market was functioning in practice, and what it knew about fees being paid and costs incurred elsewhere. Although South West Care Homes was cited in Redcar (see para 61), it is not referred to in the discussion of what it means to have regard to the actual costs of care. I agree with the approach of Singh J in South West Care Homes on this issue.
38. Ms Bowie was authorised by the Council to make decisions in relation to the 2012 contract (witness statement, para 30). She has extensive experience in the adult care sector. She has previously and whilst working in Northumberland had responsibilities for running care services including care homes for older people and has an understanding of the costs involved (witness statement, para 2).
39. At paragraphs 30-44 of her witness statement she sets out the background to the consultation in relation to the 2012 contract. She states (para 32):

"It was a prime objective for me to be satisfied that the fees paid by the Council to the care home providers would be sufficient to cover the costs of providing care in homes operating at reasonable levels of occupancy, although it was not the intention to subsidise over-capacity or incentivise the development of further excess capacity."

40. Ms Bowie identifies four particular matters which she states it is important to emphasise in understanding the Council's approach to the negotiations and its eventual decision. First, throughout the operation of the 2009 Contract, the Council had been aware that the base fee it paid to care home operators since 2004 was significantly higher than fees paid by other local authorities to care home operators. This disparity had been generated by the use of the PWC Model in negotiating the terms of the 2005 Contract. She had no reason to believe that the lower fees payable in other areas were insufficient to meet the cost of a sustainable care home sector. Second, the Council faced highly unusual and extreme budgetary conditions, and had to have the need to make savings in mind when negotiating contracts in a variety of different sectors, including adult care. Third, it was apparent that the Council's existing fee rates were leading to over capacity in the market. At paragraph 38 of her witness statement she states:

"There had been and continued to be substantial investment by providers in new care homes in Northumberland, despite the fact that the number of local authority placements in care homes was no longer growing, because of the increasing emphasis on supporting people to live independently. … We monitor occupancy rates regularly by contacting all care homes. I understand from documents prepared at the time when the PWC model was run in 2004 that the overall vacancy rate in care homes in Northumberland was then 6%. In the autumn of 2011 it was averaging around 12% and has since increased further, and has been around 13% in the months since April 2012. Well managed care homes should aim for vacancy rates of no more than 5%, that being a level which allows sufficient flexibility in relation to new placements. In October 2011, there were 20 care homes (out of 81) operating with vacancy levels of more than 20%. It seemed clear to me and the Council that these care homes must have been able to continue to operate at low capacity levels due to the significant profits generated by the existing fee levels."

41. Fourth, for the reasons already mentioned, and following further discussions which she had with Mr Bradley the Council remained reluctant to run the PWC Model (or its like) in the course of negotiating the 2012 Contract.
42. At paragraph 44 of her witness statement Ms Bowie makes clear that, when at various points in the negotiations the word "efficiencies" was used to describe reductions in the real level of fees to be paid by the Council to care homes,

"this term was not intended only to refer narrowly to technical efficiencies such as increased productivity, but also covered more broadly all of the ways in which providers could accommodate to reduced fees, including increasing their occupancy rates, removing cross-subsidies to other areas of their businesses and accepting reductions in their profit margins."

43. At paragraph 57 of her witness statement Ms Bowie says that she anticipated that, if costs had significantly risen since negotiating the 2009 Contract beyond what had been provided for in the inflator applied to fees under that contract, and proposals were insufficient to adequately cover the cost of care, care home providers would tell the Council about that and produce evidence in support. They were aware of the actual costs associated with running a care home and providing care, and if the Council's proposed fees were unrealistic, she was of the view that the care home providers were best placed to inform the Council of this. The Council did consider management accounts of care homes to the limited extent that the Claimants were willing to allow this. Mr Bradley in his witness statement at paragraphs 36-44 refers to a meeting between the Council and the Claimants on 16 April 2012 when Mr McArdle offered to allow the Council access to evidence as to why placements cost more in Northumberland than elsewhere. Mr Bradley met with Mr McArdle at his offices on 18 April 2012. At the meeting Mr McArdle produced a set of management accounts for all of his care homes including the three care homes he operates in Northumberland. The accounts confirmed that two of the homes were generating a significant level of profit per bed per month, however the profit for the third home was generating a lower profit. It was clear to Mr Bradley, from a consideration of the contents of the management accounts, that the third home had significantly higher staffing costs than the other two homes. Mr Bradley does not accept that the nature of the Council's area is such that care homes operating within it are intrinsically likely to have materially higher costs.
44. Further evidence which shows that account was taken by the Defendant of care costs is that the Council was informed by the position of those providers with whom it was able to reach agreement. Four Seasons Health Care, a major provider which accounted by itself for 19% of placements in the county, indicated before it reached agreement with the Council that it was having the proposals considered by its finance team to ensure that they would adequately cover the costs of providing care and achieve an acceptable profit margin. (See witness statement of Ms Bowie at paras 85, 87 and 92; and Mr Bradley's witness statement at para 45). Another provider with whom the Council reached agreement was HC1. During the course of negotiations HC1 shared with the Council a spreadsheet setting out their costs of providing care. Mr Bradley at paragraph 46 of his witness statement states that he considered this document in detail together with the Council's proposed fees under the 2012 Contract:

"The figures contained within the spreadsheet provided strong evidence that the fees proposed under the 2012 Contract were sufficient to cover the costs of care and indeed could still be argued to be generous in terms of a fee level if providers could maintain high levels of occupancy within their homes. … It was clear that with the current fee structure occupancy would have to fall to quite low levels in most cases before homes could be at risk. This again reinforced our belief that the market could cope with static or even reduced fees from those currently in place."

45. At paragraph 43 of her witness statement Ms Bowie states:

"… I knew that as we entered into a process of negotiation, if any efficiencies proposed would mean that fees were inadequate to meet the costs of care, care home providers would be unlikely willingly to sign up to contract on those terms. … If…a large number of providers were to sign up rapidly and without accompanying representations, this would constitute good evidence that the fees proposed were adequate to meet care provision costs."

Ms McColgan makes the point by reference to the evidence of Mr Hunter (B5) and Mr Gibson, the Business Development Director for Executive Care Group Ltd, that some providers would not "have the economic option of refusing to sign the Council's new contract" (B126). However the fact is the Council reached agreement with providers representing 20% of beds in the county before it made its offer of 12 March 2012; that total rose to over 40% before the Council decided to set the offered rate as its usual rate without protest from providers about the terms; and by 5 April 2012 providers representing 70% of placements had signed up to the proposed contract, which Ms Bowie states at paragraph 105 of her witness statement

"did not suggest that the fees proposed were insufficient to cover the cost of care. They had not done so under protest or after prolonged delays suggesting that they felt they had no choice, but quickly and readily."

46. In conclusion, I am entirely satisfied that the Council did have due regard to the actual costs of care as required by the Circular.
47. As for Building Capacity, the key statement on which the Claimants rely, is that:

"Fee setting must take into account the legitimate current and future costs faced by providers as well as the factors that affect those costs, and the potential for improved performance and more cost effective ways of working." (See para 10 above).

Mr Giffin accepts that this statement is somewhat more explicit than anything in the Circular, and clearly issues such as the present are the true subject matter of Building Capacity. However the guidance is not prescriptive as to how fee setting ought to take costs and the factors affecting them into account.

48. In R (Khatun and others) v Newham LBC [2005] QB 37 the court was considering the Housing Act 1996, part VII, section 182 which provides:

"(1) In the exercise of their functions relating to homelessness and the prevention of homelessness, a local housing authority or social services authority shall have regard to such guidance as may from time to time be given by the Secretary of State."

In respect of the guidance that was given by the Secretary of State, Laws LJ stated at paragraph 47:

"Although the guidance is provided for by statute and housing authorities are obliged by section 182 of the 1996 Act to have regard to it, it is not a source of law. … Respondents to such [guidance] must (a) take it into account and (b) if they decide to depart from it, given clear reasons for doing so."

49. Building Capacity is non-statutory guidance. Plainly therefore the Council was obliged to do no more than that.
50. The Council did have regard to Building Capacity. That is not in issue. Building Capacity was issued in October 2001. In its letter of 12 March 2012 (see para 12 above) the Council recognised that it might be said to be departing from the guidance. Ms Bowie wrote:

"The Council has considered carefully the relevance of Building Capacity to its decisions. It believes that this document reflects the position at a particular time, when circumstances and national policy were different. For instance it gives advice in favour of block contracts and long term commitments by councils on the level of services they will be buying, which is clearly inconsistent with current national policy on personalisation and self-directed support. In addition, the introduction to 'Building Capacity' includes the following statement:

The Government also recognises that the successful operation of this agreement will, amongst other things, depend on an adequate level of resourcing to achieve the right level of service. The Government is providing significant additional resources for social services. Funding has increased by over 16% in real terms since 1996/7 and will increase by an average of 3.4% per annum in real terms over the next two years.

The Council's view is therefore that Building Capacity is advice issued at a time when both policy and public sector finances were different, and that, while it still has some value as a source of advice, it is now reasonable to depart from its advice, or at least from the way in which the County Council and other interpreted that advice in the last decade."

51. Mr Bradley makes the point at paragraph 21 of his witness statement that, in line with current national policy, the Council's general view is that the majority of older people wish to stay at home for as long as possible, and the Council's aim is to find ways in which to support them to do so. This will in turn reduce the need for capacity in care homes. That being so the Council was, Mr Giffin submits, under no obligation to base its decision upon specific data about existing costs, when what was really required was a judgment about how far prices could be held down consistently with returning the market to a more appropriate level of capacity.
52. Mr Bradley in his witness statement at paragraphs 14-23 explains the deficiencies in the PWC Model and other models such as those developed by Ernst & Young, and Laing & Buisson. He concluded (at para 23) that:

"… the underlying issue is that, even with tweaks in methodology we believe that any model which is based on surveying current costs at a specific point in time and setting fees which attempt to capture the variations between types of homes at that time is flawed. This is because it fails to recognise the dynamic interaction between local authority fee rates, the construction of new homes, and changes in cost. In my view, it was important for us to break out of what was becoming a cycle of increasing costs and increasing expenditure for a type of service which is not what the majority of older people want."

53. In my view the Council was entitled to depart from Building Capacity for the reasons given. The guidance was taken into account, and clear reasons were given by the Council for departing, in so far as it did, from it. The reasons given for the departure are plainly rational.
54. As noted (see para 31 above) there is no express reference to the Circular in the contemporaneous documentation. The first reference in the Defendant's documentation to the Circular is in a memo of 3 July 2012, written after Mr McArdle had drawn Ms Bowie's attention to it by a letter dated 24 April 2012. This was after the decision under challenge had been taken. However Ms Bowie states at paragraph 58 of her witness statement, with regard to the Circular:

"… I was conscious of its contents at the time at which the 2012 Contract negotiations were taking place. I have worked in the adult care sector for a number of years, and the 2004 Circular is part of the statutory framework from which I work."

It is not suggested that the contents of the Circular, and in particular the critical words in paragraph 2.5.4 ("due regard to the actual costs of providing care") add anything to Building Capacity. In my view the reasons which justified departure from Building Capacity would have amounted to a "good reason" (see paras 50-53 above) for deviating from the Circular. In fact, as I have found, the Council did have due regard to the actual costs of providing care and other local factors, as the Circular required.

Ground 3: that the Defendant acted irrationally and/or failed to take into account relevant considerations

55. Ms McColgan submits that the Defendant arbitrarily concluded that savings of particular magnitudes were possible in 2012-13 and subsequent years and imposed these savings on care home providers, with the result of freezing fees for a period of years after the initial reduction (this after a freeze in fees since 2009-10) in the case of Band 1 homes, and reducing them in the case of Band 2 and 3 homes (on which efficiency savings were imposed without any inflationary uplifts at all).
56. It is said that the "true reason" (see Claimants' skeleton argument, para 89) for the Defendant's categorisation of reductions in fees as "efficiency savings" appears from para 1.12 of the Council's briefing note dated 24 November 2011:

"It is very doubtful whether a simple freezing of fee rates would be upheld by the courts as reasonable if challenged, though it is possible that agreement could be reached on a more sophisticated approach which restrains cost pressures, particularly given the relatively high fees paid by the Council. Since care home fees are a substantial element in the adult care budget, payment of inflation in full, without any offsetting changes to other terms, would involved a seven-figure cost to the Council."

57. The briefing note, as Mr Giffin observes, simply suggested (rightly or wrongly) that merely to freeze rates was unlikely to be upheld as reasonable, and that agreement might be reached on a more sophisticated approach. That is what the Council sought to do; it proposed different treatment of homes in different bands at different stages of the contract, and negotiated with providers about that.
58. In considering this ground of complaint I bear in mind the preliminary observations of Beatson J in R (on the application of Bevan & Clark LLP and others) v Neath Port Talbot County Borough Council [2012] EWHC 236 (Admin) at para [58]:

"… a judicial review court will be particularly circumspect in engaging with the conclusions of the primary decision-maker in relation to complex economic and technical questions."

The setting of normal fee rates for the provision of residential care is a matter involving economic and financial assessment, a degree of expertise in how the sector operates, and judgment about the proper allocation of scarce resources.

59. In my view there can be no proper criticism of the Defendant's approach to "efficiency savings", as that term is used and explained by Ms Bowie (see para 42 above). Further at paragraph 27 of her witness statement she states:

"… the overall level of fees was in fact still substantially higher than needed to cover reasonable costs, and the development of the market in the period since 2009 has confirmed that."

At paragraph 62 of her witness statement Ms Bowie states that she "considered that significant efficiencies could be realised, much higher than those actually proposed". She continues:

"The level of the efficiencies we proposed was low, and was front-loaded in order to reflect increased costs that care home providers may suffer, year on year over the course of the contract period, for example as a result of inflation or national minimum wage rises."

60. In my view the whole issue of efficiency savings is one that involves the exercise of judgment, in this case, by individuals with substantial experience of the residential care sector. Ms Bowie and Mr Bradley were plainly entitled on the evidence to take the view that they did on deficiencies in the PWC model, occupancy levels and efficiency savings (see para 40 above).
61. At paragraphs 33-35 of his witness statement Mr Bradley comments on the consultation process with the Claimants. During the course of the consultation process the Claimant stated that the fees proposed by the Council did not take account of the fact that various costs would rise throughout the course of the 2012 contract. Mr Bradley refers to the e-mail from Mr Hunter dated 26 January 2012 which contained information as to anticipated cost increases between 2012 and 2015 and contained figures, inter alia, as to expected inflation and interest rates. Having considered the information Mr Bradley did not disagree that it was reasonable to suppose that the real costs of delivering care would rise throughout the course of the 2012 contract. However in his view that "simply begged the question whether the current prices were already sufficient to cover both the current and the increased costs". He considered that

"based on the evidence of the way in which the market had been operating in Northumberland, comparable rates elsewhere and the continued operation of Band 4 care homes, there were strong reasons to believe that the base fees proposed by the Council were more than adequate to cover the cost of care, and were high enough to account for the anticipated cost increases that care home providers would face over the course of the 2012 Contract."

62. In my view the Council did have regard to relevant considerations, and reached a conclusion that was well within the ambit of its legitimate judgment.

Ground 1: that the Defendant failed to comply with its duties of consultation

63. This is not a case where there was no consultation. In fact, as is clear from the contemporaneous documentation and the witness statements, there was a considerable amount of consultation between October 2011 and March 2012 (see paras 12 to 23 above). During the course of the hearing it became clear that the Claimant's real complaint in relation to consultation is that it should have been directed to assessing the actual costs of care. The obligation to consult requires consultation when the proposals are still at a formative stage. There was no such consultation, it is said, with regard to assessing actual costs.
64. Ms McColgan observed, Ground 3 "does not add a huge amount to Ground 2". Basically it is a complaint that flows from the alleged failure by the Defendant to quantify actual costs.
65. However, for the reasons I have stated, the Defendant was not required to quantify costs in the way contended for by the Claimants. That being so, the absence of a quantification of costs could not invalidate the consultation process. The Claimants could have requested a quantification of actual costs, but they did not do so.
66. There was consultation, in my view, when the proposals were at a formative stage. There is some confusion in the evidence as to when the final decision was taken. By a letter dated 11 May 2012 Hempsons, the Defendant's then solicitors, wrote to the Claimants' solicitors:

"We can confirm that the consultation regarding the setting of care home fees has concluded. The conclusion of this was communicated to all providers by way of letter dated [12] March 2012, enclosing the new contract, together with an explanation of the process followed in setting the new rates. You may treat this as the date that a 'final decision' was reached by the Commissioners."

This is in fact not correct. The letter of 12 March 2012 contains an offer in the terms set out in the enclosed contract and indicates a predisposition to those terms. After 12 March 2012 there was further consultation (see para 22 above). The letter of 27 March 2012 sets the fees in the contract already circulated as the Council's "usual rates", and the letter confirmed that the Council did not expect to make placements from 1 April 2012 with homes which had not accepted these terms. That letter evidences a final decision.

67. However whether the date of the final decision be 12 or 27 March 2012 matters not. What is important is that on the evidence proper consultation occurred when the proposals were at a formative stage.
68. Any suggestion, if it be made, that the consultation on the part of the Defendant was not genuine or that "the Defendant's corporate ears were shut to the Claimants' attempts to engage with it on the cost of care provision in Northumberland" (Claimants' skeleton argument, para 40) is not tenable. It is clear from the evidence that the Defendant engaged genuinely and properly in the consultation process.

Ground 4: challenge to Defendant's refusal to contract with providers unless they agree the contract terms issued in March 2012

69. The Claimants contend that the Defendant has abused its dominant position in the market and acted contrary to paragraph 3 of the Directions. Paragraph 3(d) of the Directions state:

"(d) the persons in charge of the preferred accommodation provide it subject to the authority's usual terms and conditions, having regard to the nature of the accommodation, for providing accommodation for such a person under Part III of the National Assistance Act 1948."

70. Ms McColgan submits that the Defendant is not entitled effectively to exclude care home operators from a list of preferred providers, with placements to be made only in exceptional circumstances personally approved by Ms Bowie, on the sole basis that such operators have declined to sign a contract in respect of which they are in dispute. The Claimant disavows any suggestion that the Defendant cannot impose its own usual terms and conditions on private contractors pursuant to paragraph 3(d), or that care providers could insist on being paid any particular fee by the Defendant. What, it is said, is being challenged is the maintenance of a closed list of providers in whose homes the Defendant is willing to place funded residents, that list being drawn up on the terms of providers' willingness to sign up to (rather than to accept in particular cases) the Defendant's rates (see Claimants' skeleton argument, para 101; and Circular, paras 2.5.4, 2.5.16-17 and 6.1).
71. However, Mr Giffin has confirmed that the Defendant does not maintain a closed list of providers in whose homes it is willing to place funded residents. The Defendant is required under the Directions to comply with any individual's preference as to a care home which will provide care for no more than its usual costs and on its usual terms and conditions. The point about signing the contract is that it contains the Defendant's usual rates and terms and conditions. The Directions do not oblige the Defendant to place an individual with a particular operator.
72. The Defendant has set its usual rates for care and its normal terms and conditions, and its policy is that it would not normally place individuals at homes that do not accept those rates and those terms and conditions. There is nothing irrational about that approach. Indeed that is the approach that the Directions contemplate, when they say, in effect, that those are the circumstances in which the individual cannot insist on a placement in such a home.
73. However the Council could not and has not excluded the possibility of making a placement on different terms in a case that is not "usual".
74. At paragraph 7 of her witness statement Ms Bowie states:

"… The practical effect of paragraph 3(b) of the Directions is that, if a local authority decides to discharge its duty to provide accommodation in premises provided by a third party, it has to identify the rates that it will 'usually expect to pay' for such accommodation. The Directions do not mean, however, that a local authority is entitled to impose a blanket prohibition on placing prospective residents in accommodation which costs more than the 'usual' cost. The fee arrangements which an authority may have with providers is not finally determinative of where a person may be placed."

75. Mr Giffin observes that there may be cases where a local authority has to make a placement because otherwise it could not cater for the individual's needs or there may be a case where strong compassionate grounds require it to use a particular care home.
76. The Claimants do not allege that in any individual case the Defendant has acted unlawfully.
77. In my judgment the allegation of abuse of dominant position and that the Defendant has acted in breach of the Directions and the Circular is not made out.

Conclusion

78. For the reasons I have given this claim fails.