England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT AT MANCHESTER

		Manchester Civil Justice Centre, 1 Bridge Street West, Manchester M60 9DJ
		21 April 2015

His Honour Judge Stephen Davies:

1. The first and the second claimants each own and operate a care home in St. Helens. They are dissatisfied with the care home payment rates set by the defendant local authority for the provision of residential care accommodation for the financial year 2013/14 and by these judicial review proceedings seek an order quashing the decision to set those rates.
2. In summary they contend, through Ms McColgan, that the defendant's decision was flawed because of its treatment of a particular element of their actual costs of running their care homes, most commonly known as "return on capital". Their grounds of challenge, for which permission was granted by HHJ Pelling, QC, sitting as a High Court Judge, on their oral renewal from the prior refusal of permission by HHJ Bidder, QC, also sitting as a High Court Judge, are three-fold:

Ground 1: because the model on which the decision is based contains a flawed approach to return on capital (as a component of the actual cost of residential care accommodation), the decision was irrational and/or failed to take into account relevant considerations and/or took into account irrelevant considerations.

Ground 2: by reason of ground 1 the defendant failed to pay due regard to the actual cost of care, contrary to the relevant statutory guidance, thus rendering itself unable to demonstrate that fee levels were sufficient to meet assessed care needs, also contrary to the statutory guidance.

Ground 3: by reason of ground 1 the defendant failed to comply with its public sector equality duty.

The defendant, through Ms Morris, QC, disputes all three grounds, contending that its approach to return on capital was entirely proper and in accordance with the relevant statutory guidance, and that it fully complied with its public sector equality duty.

I am grateful to both counsel for their helpful skeleton arguments and eloquent and focussed oral submissions.

3. For the reasons given below I am satisfied that the challenge to the decision fails on all three grounds. Grounds 1 and 2 are closely inter-related and I will consider them together. Ms McColgan accepted, rightly in my view, that unless the claimants succeeded on grounds 1 and 2 they could not succeed on ground 3, so that I can deal with that ground subsequently and relatively briefly.

The relevant framework applicable to grounds 1 and 2

4. There is no need for me to rehearse in detail the relevant legislation, directions and statutory guidance, which were summarised by Sullivan LJ in the decision of the Court of Appeal in R (Care Home East) v Northumberland County Council [2013] EWCA Civ 1740 at [4-7], and which are also set out in more detail in the first instance decisions on this topic, some of which I shall need to refer later.
5. It suffices to say that the relevant statute imposes a duty on local authorities to make arrangements for residential care accommodation for persons who need it, and that the relevant directions provide that such persons should be entitled to be accommodated at their preferred care homes, but that the local authority should not be obliged to pay more than they would usually expect to pay for the relevant type of residential care accommodation (known for short as "the usual cost"). The relevant statutory guidance exhorts local authorities to set their usual costs at the start of each financial or other planning period, no doubt to ensure that everyone affected (including residents, their families, and care home owners) can know where they stand financially.
6. What is significant for the purposes of this case is that paragraph 2.5.4 of the statutory guidance requires the usual cost to be "sufficient to meet the assessed care needs of supported residents in residential accommodation" and directs local authorities to "have due regard" to three specified matters, namely:

(1) The actual costs of providing care.

(2) Other local factors.

(3) Best value requirements under the Local Government Act 1999.

7. Moreover, paragraph 3.3 of the guidance requires a local authority to "be able to demonstrate that this [usual] 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". Thus local authorities must exclude the possibility of "top-up" payments from consideration when fixing the usual costs.

The legal principles applicable to grounds 1 and 2

8. The Court of Appeal in Northumberland emphasised the following important points:

(1) In complying with the statutory guidance to have due regard to the actual costs of care local authorities are not obliged to follow any particular methodology, whether structured or otherwise [16-17]. In particular, whilst one way of having due regard to the actual costs of care is by carrying out an arithmetical calculation, identifying the figures attributed to the constituent elements, there is no obligation to do so, and that is not the only legally permissible way of having due regard to the actual costs of care [23].

(2) Whilst local authorities are under a public law duty to make a sufficient inquiry into the actual costs of care [18], it is generally for them to decide on the manner and intensity of that inquiry [19]. Sullivan LJ referred with approval to the earlier judgment of Beatson J (as he then was) in R (Bevan & Clarke LLP) v Neath Port Talbot County Borough Council [2012] EWHC 236 (Admin).

(3) Since these are claims for judicial review and not appeals on the merits, and bearing in mind that the manner and intensity of the inquiry is generally a matter for the local authority, judges at first instance should refrain from delving in great detail into the facts [35]. The approach adopted by Supperstone J at first instance in Northumberland, and previously by Singh J in R (South West Care Homes) v Devon County Council [2012] EWHC 1867 should be followed [36]. Aikens LJ in his concurring judgment specifically associated himself with these observations [40].

9. The approach of Supperstone J and Singh J which was commended to first instance judges by the Court of Appeal is to be found in [36-37] of the judgment of Supperstone J at first instance in Northumberland.

(1) The obligation to have due regard to actual costs means no more than when determining usual costs local authorities should bear in mind, amongst other matters, the providers' need to recover their costs. There is no obligation to calculate or ascertain the actual cost of care [36].

(2) It is for the local authority to decide not only the nature and intensity of the inquiry, but also on the weight to be given to a relevant factor in the absence of irrationality [37].

As Singh J said in South West Care Homes in this context at [25], the relevant factors may well pull in different directions, and the balancing exercise is "quintessentially a function of the public authority concerned, subject always to judicial review on the ground of irrationality". Moreover, as Stanley Burnton J (as he then was) said in R (Birmingham Care Consortium) v Birmingham City Council [2002] EWHC 2118 (Admin), questions of affordability and of the allocation of resources are for the democratically elected executive and legislature, not for the courts [32].

(3) The local authority is entitled to have due regard to actual costs of care not by an exercise in precise quantification, but by exercising its judgment and experience in the light of how the market was functioning [37].

10. There are also some other relevant points which emerge from the decision of the Court of Appeal in Northumberland and some of the first instance cases which I should mention at this stage.
11. First, it is common ground that when setting usual costs local authorities are entitled to have regard to all relevant factors, not just to the three particular matters to which they are directed to have due regard by the statutory guidance. Given the breadth of the specified category of "other local factors", many will fall within this category in any event but, even if they do not, local authorities are entitled to have regard to such other factors as are relevant.

In particular I refer to two factors which have featured in this case:

(1) Affordability.

Stanley Burnton J said in the Birmingham case at [32] that "affordability is in general a highly relevant consideration to be taken into account by a local authority in making its decisions on rates to be offered to service providers, subject to the local authority being able to meet its duties at the rates it offers".

That statement was endorsed by Hickinbottom J in (Forest Care Home Ltd) v Pembrokeshire County Council [2010] EWHC 3514 (Admin) at [142].

Beatson J also held in terms in Bevan & Clarke that a local authority is entitled to take its resources into account in setting the fee to be provided to providers [68].

(2) The state of the local market in care provision.

In Northumberland Sullivan LJ noted at [30], with evident agreement, the appellant's acceptance that this was a relevant factor for the local authority to take into account.

12. Nonetheless Ms McColgan submitted that a local authority was not entitled to have regard to affordability when inquiring into the actual, as opposed to the usual, costs of care, because what the local authority could afford was an irrelevant factor when considering the actual costs of care, being the costs actually incurred by care homes. I accept this submission as correct in principle, and Ms Morris did not contend to the contrary.
13. Ms McColgan, whilst accepting that matters such as benchmarking (i.e. having regard to the usual costs set by other local authorities in the surrounding area) and the state of the local market in care provision might be relevant in principle to ascertaining actual costs of care, submitted that in order to rely on them for such purpose the local authority would have to be able to justify how they were relevant for that purpose, as opposed to the wider purpose of setting the usual costs of care. I do not accept this submission. It is quite clear in my judgment that the Court of Appeal in Northumberland was rejecting the argument that a rigid distinction had to be drawn between the actual costs of care and the usual costs of care, whether at the stage of inquiring into matters relevant to their decision including the actual costs of care, or at the stage of making the decision as to what usual costs to set.
14. As Ms Morris rightly submitted in my judgment, the court should not require local authorities to undertake an unduly formalistic analysis when making and promulgating decisions setting the usual costs of care. She submitted that the duty to have regard to actual costs does not require the local authority, when producing its officer's report or making its decision, to produce a separate section recording its inquiry into, and conclusions as to, the actual costs of care, so as to be able to demonstrate that its approach was not infected by cross-contamination by irrelevant matters. She submitted, and I accept as correct as a matter of general principle, that such reports and decisions should not be scrutinised in the same way as the court would scrutinise, for example, primary legislation, and that they should be given a fair reading in the context that they are not prepared by lawyers with judicial review in mind. In the absence of some material or evidence which indicates that the decision maker has, or may have, committed some public law error in its approach, it is not necessary for the decision maker to have to disprove, whether by reference to material produced at the time or by reference to subsequently obtained evidence, any possibility of such an error.
15. It is convenient at this point to consider the approach which the court should adopt as regards any errors which might have been committed by a local authority whilst setting the usual costs of care and, in particular, whilst inquiring into the actual costs of care in order to comply with the obligation to have due regard to that factor. The starting point, of course, is that the local authority is the decision maker, and the court cannot interfere by way of judicial review simply because it appears to the court that in arriving at that decision a mistake of fact has been made along the way. Ms McColgan, whilst not challenging that as a starting point, submitted that ordinary public law principles nonetheless apply with full rigour to the decision in this case. She referred me to the judgment of Beatson J in R (Mavalon Care Ltd) v Pembrokeshire County Council [2011] EWHC 3371 (Admin). In that case Beatson J was satisfied that the local authority had made errors in the context of setting the usual costs of care. At [52] he analysed the significance of those errors along orthodox public law lines. Thus he categorised them as amounting either to the error of failing to ask the right question or to the error of reaching a decision based on irrelevant factors, because in that case he was satisfied that the decision was based on a mistaken appreciation of the position or on a misinterpretation of the relevant consideration.
16. However that paragraph must in my view be read in the context of [40], where Beatson J stated in clear terms that it was not the function of the court to engage in the merits of the decision or with the conclusions of the local authority, particularly in relation to complex economic and technical questions. He said that he did not need to enter that "difficult territory" in that case, because on the particular facts of that case the local authority had committed itself to applying a certain approach, so that its departure from that approach had to be both rationally justified and also shared with the affected care home providers [43]. Indeed Beatson J made precisely this point when explaining his decision in Mavalon in his later decision in Bevan & Clarke at [58]. Moreover, it is to be noted that his decision in Mavalon at [52] was in the specific context of the local authority having accepted that it had fallen into error, but seeking to persuade the judge that the errors had "not affected the decision in more than an insubstantial or insignificant way" [49].
17. Ms Morris submitted that the court should not interfere unless the error was a fundamental one. In support she referred me to the judgment of HHJ Gosnell (sitting as a High Court Judge) in R (Members of the Committee of Care North East Newcastle) v Newcastle City Council [2012] EWHC 2655 (Admin), where at [42] he said that the error should be "fundamental to constitute public law reviewable error", and to the judgment of HHJ Lambert (sitting as a High Court Judge) in R (Torbay Quality Care Forum) v Torbay Council [2014] EWHC 4321 (Admin), where at [60] he referred to the decision being "fundamentally flawed". However it does not seem to me that these observations are intended to suggest that some different test should be applied to decisions of this kind. They are simply pithy statements recognising, as has been said in the cases to which I have already referred, that this is judicial review not appeal on the merits, and that in relatively complex decision making of this kind, where the extent of the inquiry is generally for the local authority, as is the weighing of a number of different factors, including the exercise of judgment as to the interplay between matters medical, matters social, matters financial and matters political, the court should not intervene unless the decision can clearly be seen to have been irrational or vitiated by some other significant public law error.
18. In my view it is implicit in what Sullivan LJ said in Northumberland at [35-36] that courts should exercise great caution before finding that a decision to set usual costs should be quashed on the basis either that there had been an insufficient inquiry into the actual costs of care, or that the local authority in question had committed some other arguable breach of public law duty whilst engaged in the minutiae of that inquiry.

Return on capital

19. Ms McColgan referred me to authority in support of her submission that return on capital has been recognised by the courts as an aspect of the actual cost of care. She referred me in particular to the decision of Stanley Burnton J in Birmingham at [19], the decision of Hickinbottom J in Forest Care Homes at [112], the decision of HHJ Gosnell in Newcastle at [45], and the decision of HHJ Belcher (sitting as a High Court Judge) in R (South Tyneside Care Home Owners Association) v South Tyneside Council [2013] EWHC 1827 (Admin) at [56].
20. However in my judgment these passages must be read in their context and do not, on proper analysis, establish that as a matter of fact or law that a local authority must include some allowance for return on capital, still less a specified minimum rate of return on capital, either when inquiring into actual costs or in setting usual costs. In all of these cases and, indeed, in the instant case the local authorities had been provided with reports from expert accountants setting out their investigations and conclusions as to the actual costs of care or the fair costs of care in the local authority area in question. In the first two cases – and in this case – there had been a report from a practice known as Laing & Buisson, commonly instructed by care home owners. These reports include what are known as financial models (or "toolkits") in the form of spreadsheets which, when populated with data in accordance with the figures in the reports, produce the appropriate rates on a per resident basis^[1]. They typically include as a constituent element an allowance for return on capital. This involves ascertaining what are said to be relevant capital costs, including items such the cost of the land and buildings comprising care homes in the area. It also involves ascertaining a percentage figure as an appropriate rate of return to be applied to those capital costs. This rate of return on capital, when applied to the capital costs, produces the return on capital cost, and is intended to reflect the revenue stream which is required by care homes to finance capital costs and provide a profit. In many cases, and in this case, it is the selection of the appropriate rate of return on capital which has proved controversial, because the local authorities are unwilling to accept the rate of return on capital figure put forward by report writers such as Laing & Buisson.
21. Thus in the Birmingham and in the Forest Care Homes cases Stanley Burnton J and Hickinbottom J were considering the issue of return on capital in the context of the fact that the claimants were seeking to rely on reports from Laing & Buisson which included an allowance for return on capital with which the local authority disagreed. The judges were not being asked to determine a dispute on the merits as to whether or not return on capital should be allowed as part of the actual costs of care, let alone what a proper rate of return on capital should be, and nor did they purport to do so. In Newcastle the issue was the decision to strip out any allowance for return on capital from the accountancy model it was using without any proper basis. In South Tyneside, the issue was the decision to make no allowance for return on capital in the context of using an arithmetical model without making any enquiry as to that element of cost. In all of these cases the focus, rightly, was on the process not the substance. It was only in the latter case that HHJ Belcher was asked to and did, despite her initial view that it was unnecessary to do so [47], decide the issue. In the event however it is plain from her decision that it was not necessary for her decision to decide this issue. Neither is it necessary for me to do so in this case, nor do I regard it as appropriate to do so in the context of judicial review. That is because in this case it is apparent that the defendant did have regard to return on capital as a constituent element of the cost of care, and the real issue is whether or not it fell into public law error in its approach to that issue.
22. Ms McColgan accepts, as she had to following Northumberland, that the defendant was not obliged to employ an arithmetical modelling exercise to ascertain the actual costs of care, including return on capital. She submits however that, having elected to adopt an arithmetical modelling approach, the defendant in this case was obliged to do so properly, and that it had not done so, nor had it sought to adopt any other proper approach. Ms Morris submits that this analysis is in reality no more than a thinly disguised attempt to resurrect the old heresy, laid to rest by the Court of Appeal in Northumberland. She submitted that there was no basis for contending that a local authority, when inquiring into actual costs or in setting usual costs, and in particular when considering the appropriate rate of return on capital, had to adopt an "either/or" approach, i.e. either precise quantification by arithmetical modelling exercise or assessment solely by the exercise of judgment and experience. She submitted that it was perfectly permissible for local authorities to place such weight as they properly concluded that they could on sources of information such as reports from Laing & Buisson, but also to place weight on their own investigations and their own judgment and experience, and to have regard to the actual costs of care in that manner – in short a "hybrid" approach.
23. I accept Ms Morris' submission. It is quite clear from the cases that since the manner and intensity of its inquiry is a matter for the local authority, and since there is no obligation to adopt any particular approach or methodology, there can be no objection to a local authority adopting a hybrid approach, so long as it does so without public law error. Moreover, in the context of the inquiry into the appropriate rate of return on capital to adopt, it is evident from the evidence, both in this and the other cases, that it is a matter which cannot be answered solely by an arithmetical modelling approach. It is apparent from the Laing & Buisson reports that they used their own investigations and expertise to arrive at an opinion as to what would be an appropriate rate of return on capital. But it is immediately apparent that opinions may legitimately differ, because what would be an acceptable rate of return on capital to one care home owner or potential investor would not necessarily be acceptable to another, even in the same area, because they may have very different financial commitments and aspirations. To take one example, a very commercially-minded care home owner, who had recently borrowed substantial amounts to fund the purchase and development of a new care home, might well have a very different need for return on capital to that of a long established care home owner who had no outstanding borrowing costs in relation to land or buildings and who operated the care home on a not for profit basis. It is immediately apparent therefore that there is no demonstrably "right" or "wrong" answer to the question, what is the proper rate of return on capital to use when assessing the actual costs of care?

The relevant facts

24. I shall rehearse these as shortly as I am able, because in my judgment the case turns very largely upon an analysis of the report prepared for the defendant's cabinet meeting of 18 July 2012, the author of which was Caroline Barlow, employed by the defendant as an Assistant Director, Commissioning and Business Support, Adult Social Care and Health Department, who has provided evidence in the form of witness statements in this case.

The 2012 report

25. The proposal for the financial year 2012/13 was to maintain the fee rates at the same rate as the 2011/12 fee rates. The supporting detail in the report ran to 14 pages, together with 4 appendices, one being an Equality Impact Assessment ["EIA"]. Section 2 was headed "Justification for the decision", and was in the nature of an executive summary. Specifically, it summarised the consultation process and the EIA which had been undertaken, summarised the considerations which it had taken into account, including the "actual costs of providing care" [2.11], and expressed itself satisfied that:

(1) Its proposal would enable it to comply with its statutory responsibilities and that "there will continue to be adequate provision of residential and nursing care home placements for local service users" [2.11]; and

(2) "the fees it is proposing to pay will cover the actual cost of care" [2.12].

26. By reference to [2.12], repeated in [3.1.6] of the 2014 report, and a statement in the accompanying 2012 and 2014 EIA to the effect that "St. Helens has demonstrated that the proposed fees are sufficient to cover average operating costs for different types of care", Ms McColgan submits that it is clear that what the defendant had done was to adopt, without more, its assessment of the actual costs of care as the rate it was setting for the usual costs of care.
27. However, it is plain in my view that this is not what the reports or the EIA were saying. To the contrary, they were making clear that they were satisfied that the usual costs of care would sufficiently cover the actual costs of care. Thus they were recognising the difference between the two. Even if that was wrong, it cannot realistically be argued that the defendant was adopting each and every individual component of actual cost, including as relevant to this case rate of return on capital, as a component of usual cost.
28. Section 3 was headed "Facts supporting the decision", and runs to some 9 pages. Subsection 3.1, entitled "Background", refers to the defendant's difficult financial position, and the fact that expenditure on residential and nursing care homes was its single biggest item of expenditure, amounting to some £19 million annually. Subsection 3.2, entitled "Consultation process", explained that a consultation document was issued to all care homes, inviting their comments, and asking them to complete and return a table of budgeted and actual expenditure, including sections for capital costs and overheads. Subsection 3.3 reported that responses were received from only 3 providers, with whom the defendant met, but that of these only two, both charities, had completed the table of expenditure. It also reported that the defendant had received, on an anonymous basis, a copy of a "fair price for care analysis" produced by Laing & Buisson for St. Helens on the instructions of solicitors instructed to prepare for a judicial review challenge to the usual costs rates set by the defendant in the preceding year 2011/12. This, in section 10, entitled "rates of return", explained that the "fair price" should meet the requirements of investors in the market in terms of a rate of return on capital invested and business turnover, producing a rate of return on capital of 7% on the former and 14% on the latter, broadly speaking 12% overall.
29. The report continued in subsection 3.3 to state that, given the poor response to the consultation, and that the only two providers to provide expenditure details had both identified no capital costs or returns on capital employed, the defendant had decided that it would have been unfair to commercial providers to take into account only these responses. Although Ms McColgan criticises this passage as indicating that the defendant had misunderstood the nature of return on capital as pure profit, that criticism: (a) is inconsistent with the express recognition in a subsequent section [3.5.8] that return on capital is not only profit; (b) ignores the fact that, on any view, the defendant's approach was not to rely on these sources of information by themselves but to look for further sources of information on which to make its decision. Thus in [3.3.7] the defendant noted that it had decided to have regard to the Laing & Buisson report, together with a further similar report commissioned jointly by the defendant and local providers but much earlier in 2003, from an organisation known as Chameleon Approach. The Chameleon report, at p.11, recorded that the rate of return on capital chosen was 16% being "the average that would be expected in the private sector for this type of development". As Ms Morris noted, the decision to "have regard" to these reports is not the same thing as a decision to adopt and employ one or other or both of those models, including their rate of return on capital, in ascertaining actual costs of care or usual costs of care. It was stated explicitly at [3.5.5] that the defendant had not "signed up" to the Laing & Buisson model.
30. Section 3.5 is headed "financial evaluation scope". At [3.5.1] the report stated that the financial analysis undertaken considered these 4 information sources (viz. the two responses, the Laing & Buisson report and the Chameleon report), on the basis that none of the sources were felt to be robust enough on their own to be "representative of the cost of care across St. Helens", and that the defendant had felt it necessary to make some "judgment decisions" to separately identify costs of care for separate subsectors. As Ms Morris observes, this demonstrates quite clearly that this decision included the exercise of judgment by the defendant, not merely an arithmetical modelling approach. It is immediately apparent from the detailed analysis of operating costs at [3.5.6-7] that the defendant had indeed exercised its judgment in deciding to what extent it should rely on each of the information sources in undertaking its financial evaluation.
31. At [3.5.5] the defendant stated in terms that it did not "endorse" the Laing & Buisson model's approach to calculating return on capital, and that its proposed alternative approach was to be found in [3.5.8]. Again, as Ms Morris submitted, it was being made clear that the defendant was exercising its own judgment to arrive at an alternative approach, and [3.5.8] is sufficiently important to set out in full:

"Return on Capital Employed

The council is mindful the fees it pays to the care homes should cover more than its weekly operating costs. The additional payment above the weekly operating cost is referred to in the Chameleon Analysis and the Laing & Buisson analysis as the Return on Capital Employed. Care homes may treat this additional payment over and weekly operating cost in different ways:

It may be re-invested into services;

It may provide the profit element;

It may support further capital investment within the care home;

It may be a combination of the above.

There is no defined rate of return that is "correct". The Council's view is that it is up to the commissioners within the Council to make commissioning decisions based on known social factors to ensure that taxpayers' money is protected and that social care needs are met. The Council does not consider that the returns on capital of 16% in the Chameleon report or of 12% in the Laing & Buisson report are a definitive level by which to measure an appropriate percentage return on capital employed.

The rate of Return on Capital Employed has been calculated by:

Estimated costs of investments for buildings and equipment.

Assuming a corporate well run 50 bedded unit.

Incorporating occupancy level of 90%.

This has been based on a methodology contained within the Chameleon and the Laing & Buisson reports, and populated with local data where appropriate (e.g. St Helens land values). Where there are differences between the two models the Council has taken an average of the 2. This has then been incorporated into the Council's financial model. Proposals for Returns on Capital Employed are included in Section 3.11."

32. The following points can be made about this:

(1) It is clear from the first two subparagraphs that the defendant's consideration is not limited to the appropriate rate of return on capital in relation to actual costs of care, but extends to a consideration of the appropriate rate of return on capital in relation to usual costs of care. The words used ("the fees it pays should cover more than weekly operating costs" – emphasis added), coupled with the emphasis on the defendant's commissioning role in relation to protecting taxpayers' money and meeting social care needs, make that clear in my view.

(2) The third subparagraph, beginning with its opening words ("the rate of return on capital employed has been calculated by ..."), is on first reading confusing and, I confess, confused me. At face value it reads as if the rate of return on capital has been calculated by reference to the 3 factors identified, using the Chameleon and Laing & Buisson arithmetical models, averaged where appropriate. However closer analysis, assisted by Ms McColgan and Ms Morris, demonstrates that in fact the exercise which is being referred to is the exercise of applying the rate of return on capital to the appropriate capital costs, with the latter being ascertained by reference to the 3 factors identified, which are all to be found in the Laing & Buisson report. It follows, consistently with the previous sections of the report to which I have already referred, that there is no question of the rate of return on capital having been arrived at by some process of arithmetical modelling.

(3) However it is also the case that this subsection does not state what rate of return on capital has been selected by the defendant, or whether that is a return on capital for actual costs of care or usual costs of care. [3.5.8] ends by referring the reader to [3.11] for the defendant's "proposals for returns on capital employed" and it is, therefore, necessary to read [3.5.8] with [3.11].

33. Before turning to [3.11] it should be noted that in [3.6], entitled "Benchmarking", the defendant recorded that it had compared its current fees against comparator local authorities in the North West. Ms McColgan notes that there is no suggestion that it had been possible to ascertain the compare the individual rates of return on capital adopted by these comparator authorities, and I accept this. She submitted that it was not appropriate in such circumstances to rely on this benchmarking exercise to arrive at a rate of return on capital for actual costs of care. However it is quite clear from the decision at first instance in Northumberland that it is perfectly permissible to have regard to benchmarking when having due regard to actual costs of care, and it is also clear that there is no need for a local authority to undertake a comparative exercise as between the different cost elements, as opposed to in the round.
34. It should also be noted that in [3.7] the defendant considers the question of capacity in the market. The same criticism as was made as regards this as was made about benchmarking, namely that it provided no evidential basis for ascertaining the rate of return on capital, but I reject it for the same reasons. The same is true of [3.9], where the defendant considers proposed commissioning intentions. In [3.8] the defendant considers the EIA. I accept that whilst compliance with its public sector equality duty is plainly relevant to the setting of the usual costs of care (indeed the defendant would have been open to serious criticism if it had not been taken into account in that regard) it is difficult to see how the risks considered and addressed in the EIA could be relevant to actual costs of care. However: (1) there is no suggestion in the report that they were regarded as relevant to that question, and (2) there is no basis for suggesting that, even if they were, they could in any way have adversely impacted on the result. Finally, in [3.10] the defendant explained that its commissioning decision would have regard to the quality rating of the various care homes, and there can for the same reasons be no criticism of that approach.
35. In [3.11] the defendant stated that its proposal involved structuring its fees to enable potentially variable rates of return to be achieved, dependent on the type and quality of care and the efficiency of the care home. It stated that its proposed return on capital employed reflected its commissioning intentions, market capacity and demographics, and quality considerations. Its proposals, set out in a table, involved the application of differential rates of return on capital ranging from 2% to 7%.
36. It is apparent that in this subsection the defendant is setting out its proposed usual costs of care. This is quite clearly not intended to be merely a report of an inquiry into the rate of return on capital as a component of the actual cost of care.
37. The report then addresses in section 4 the risks associated with the proposed decision, which are relevant to the public sector equality duty issue, and concludes with various other matters to which I need not refer.
38. Although I have not been shown the record of the decision taken by the defendant's cabinet on 18 July 2012, it is common ground that the report was approved and the proposals passed without amendment, so that the report can be taken as a sufficient record of and explanation for the decision making process. I should also say that there was no legal challenge to that decision, even though some care home owners (including the claimants) had been involved in the commissioning of the Laing & Buisson report and had instructed solicitors to consider a challenge to the decision.

The subsequent correspondence

39. Before referring to the defendant's witness evidence about this, I should note the following points from the subsequent correspondence:

(1) On 9 May 2013, in the context of the consultation for the subsequent financial year 2013/14 rate setting exercise, the claimants' solicitors asked for the calculations resulting in the 2012/13 fee structure, "including the return on capital employed calculation". With its response dated 14 May 2013 the defendant provided the claimants' solicitors with a spreadsheet entitled "calculation of the actual cost of care (St Helens 2012)". What is relevant about this is that it shows the differential rate of return on capital as set out in [3.11], and also the capital cost to which that rate of return on capital has been applied. Significantly, it also shows the total actual cost of care and, separately, the overall proposed fees. There is no indication that a different rate of return on capital has been used for the actual and the usual costs of care, and it is also apparent that the proposed fees are never less than, and generally higher than, the actual cost of care.

(2) Having digested this, the claimants' solicitors wrote a lengthy letter on 19 May 2013, contending that the methodology was flawed and should not be re-used for 2013/14. As regards the rate of return on capital the complaint was that the Chameleon and Laing & Buisson methodologies had been discarded without rationale, and "the approach taken appears entirely arbitrary".

(3) There was a regrettably lengthy delay in responding substantively to this letter, but on 18 October 2013 the defendant finally responded. In short, the defendant disputed that its approach was arbitrary, contending that it was "based on a number of considerations" including those identified in [3.6-3.10] of the report.

(4) By further letter dated 16 December 2013 the claimants' solicitors complained that the report had misrepresented return on capital as pure profit. I have already [paragraph 29 above] rejected that complaint, by reference to [3.5.8] of the report. By a separate letter sent the same day the claimants' solicitors wrote, attaching the accounts of the first claimant for 2010-13 in order to support the argument that the allowance for return on capital would not cover its costs let alone profit. This was noted by the defendant in its letter in reply without specific comment.

(5) Finally, by further letter dated 4 April 2014 the claimants' solicitors wrote, contending that the defendant had failed to disclose evidence to support what it said was a maximum rate of return on capital of 4%, that it had simply "plucked a figure from the air", and requesting it to "disclose the rationale for the rates of return used". The defendant's response dated 23 April 2014 disputed that the maximum rate of return on capital was 4%, not surprisingly given that the report and the decision from 2012 included rates from 2% to 7%^[2], and asserted that "the rationale for the rates of return are set out in the [2012 report]".

Ms Barlow's witness statement

40. In her principal witness statement Ms Barlow refers in [1 – 7] to her role and experience, both in terms of qualifications (she is a qualified accountant) and experience (she has over 20 years' experience in working in local authority finance, including over 12 years' experience in working in the adult social and health department of the defendant). Her role has since 2010, if not before, included supporting the council in setting care home fees, including providing financial analyses of the costs of running care homes, chairing the care forum, and providing statistical and benchmarking analyses. She sets out in some detail the process undertaken in relation to setting the fees for 2012/13, and states in terms in [32] that:

"The percentage ROCE [return on capital employed] applied to the capital cost is not purely a mathematical calculation. It is instead based on the judgment and experience of the Council in understanding the behaviour of the care homes in St Helens, the health and viability of the care homes market in St Helens and what the Council can afford."

41. In [33] she refers to the cost of borrowing in this period being very low, and in [34] she says that "the Council had regard to the capital financing costs in the Chameleon report, uprated for inflation", showing a similarly low borrowing cost. She continues as follows:

"38. A decision was made to adopt 5% ROCE as its mid-point. This was felt to be reasonable based on prevailing market conditions in St Helens, where there was felt to be an adequate capacity …. overall, where the underlying costs of borrowing were very low and, most importantly, based on what the Council could afford.

39. From that mid-point percentage adjustments were made up or down to reflect capacity and the Council's commissioning intentions" (and she explains how that was done to arrive at the range of individual rate of return on capital from 2% to 7%).

42. It must be said that this was the first time that the defendant had disclosed that it had arrived at a rate of return on capital of 5%. It prompted the claimants' solicitors to ask for the materials produced or considered in arriving at this. The reply was that "the decision was taken within the Council's discretion and we rely on the statement and the decision documents in that regard". Following that response the claimants applied for permission to cross-examine Ms Barlow on that aspect of her statement. The defendant objected, and I refused permission on the basis that this was not a hard-edged issue of fact where it was the practice of the court to give permission to cross-examine a witness, although I noted that the claimants would be able to invite me to draw any appropriate inferences from the lack of supporting documents and/or the lack of detail in the witness statement.

The 2013/14 exercise

43. The correspondence to which I have referred above was generated in the context of the defendant's consultation for the 2013/14 fee setting exercise. I need say no more about this than that:

(1) The defendant began the process, in its letter dated 19 April 2013, by referring to the 2012/13 exercise in calculating the cost of care, stating that it did not have any evidence to suggest that there had been significant changes since then, and proposing therefore to base the 2013/14 fees on the fees for the previous year, uplifted for inflation.

(2) The defendant ended the process, prior to producing its report to cabinet for 23 April 2014, by acknowledging that the representations made by the claimants' solicitors in relation to certain specific matters had led it to apply an additional uplift of 1.84% to the 2013/14 baseline fees, but otherwise making no substantive change to the proposal.

The 2014 report

44. There is no need for me to devote anything like the same detail to the 2014 report as to the 2012 report. That is because it was in very similar, in format and in substance, to the previous report. It began by describing the proposed decision, to increase fees by an amount for inflation and the additional uplift of 1.84% referred to above. Its reasons for doing so were stated, in summary, as being that it was satisfied that it could rely on the results of the 2012/13 exercise, allowing for the 1.84% uplift to reflect matters pointed out by the claimants' solicitors which it had accepted, and that having regard to all relevant factors, including its financial position, the appropriate course was to adopt the 2012/13 fees as adjusted as a baseline figure and then to allow an increase for inflation.
45. In section 3.2 it referred to the results of the consultation exercise. In addition to the correspondence with the claimants' solicitors referred to above there had also been some limited response from four care home owners, all of which were represented by the claimants' solicitors. At [3.4.5] it noted that of the total of 29 providers in its area^[3], 6 were then represented by the claimants' solicitors, of whom 2 had "indicated that they did not want to undertake the full cost of care exercise each year", and that the remaining 23 had not requested the council to "restate the 2012/13 baseline". It noted that it had a "difficult balancing position to undertake", and that it was "making its decsion based on a wider consideration of the residential and nursing care market". At [4.1.3] it stated that it was "mindful of the impact [on] the smaller providers who find it difficult and expensive to complete the cost of care exercises and on further delays to setting the 2013/14 fees for the remaining 23 providers".
46. Finally, in section 7, it noted that the alternative option was to "undertake a full cost of care process for the 2013/14 fee setting", and gave 3 reasons for not recommending this option, namely:

(i) It involved repeating the 2012/13 exercise, which had produced only a limited response from providers.

(ii) It would delay setting the 2013/14 fees.

(iii) Only a small number of care home owners favoured that approach.

47. The report was considered by cabinet at its meeting held on 23 April 2014. The minutes of the meeting show that it resolved to follow the recommendations in the report.

Grounds 1 and 2

48. Whilst the decision under challenge is that made on 23 April 2014 for the financial year 2013/14, it is apparent from the factual history and the grounds that it is in substance a challenge on the basis that the defendant ought not, when making that decision, have adopted the rates of return on capital used in arriving at the 2012 decision. It is therefore in substance a challenge to the basis on which the 2012 decision was made. The defendant has not, however, either in its detailed grounds or in its submissions to me, repeated the point made in its summary grounds that the challenge should not be allowed to be made on the grounds of delay. In my view the claimants are entitled to say, by reference to the correspondence preceding the 2014 decision to which I have referred, that they did challenge the defendant's proposals to adopt the 2012/13 rates as a baseline, so that the defendant's decision to do so in the 2014 decision entitles them to challenge that decision on that basis. However it does also follow that the defendant is entitled to say that the challenge to that decision ought to be considered in that factual context.
49. Although ground 1 asserts that the decision was irrational, Ms McColgan made it clear in her skeleton argument [36] and oral submissions that the challenge was to the process not to the substance of the decision. She accepted that the claimants had no basis for contending that the substantive decision to adopt the varying rates of return on capital of between 2% and 7% when setting the usual costs of care was itself irrational, in the sense that it was a decision which no reasonable local authority, acting reasonably and properly, could have arrived at. In the light of the Northumberland case she was clearly right to do so. As she accepted, in setting the usual cost of care the defendant was entitled to have regard to a wide range of relevant factors, including affordability, so that as she accepted a properly justified decision to depart from the actual cost of care could not in itself be the subject of judicial review challenge.
50. Ms McColgan's primary submission was that what the defendant did here was to embark on the process of ascertaining return on capital as a component of the actual cost of care by adopting the mathematical model in the Chameleon and Laing & Buisson reports, but then chose to depart from the rates of return on capital contained in those reports in a substantial way without any rational basis for so doing and, in short, simply "plucked a figure from the air". She submitted that having decided to adopt the mathematical model approach, it was not then open to the defendant to depart from that approach at least without providing a rational explanation for doing so. She submitted that in circumstances where the defendant had failed to explain the basis on which it had done this, whether in the 2012 report or in subsequent correspondence or in the 2014 report, it was not open to the defendant to do so now by producing, through Ms Barlow's witness statement, a self-serving retrospective account of having arrived at a figure of 5% by an alleged undocumented process of application of judgment and experience.
51. Ms McColgan's further or alternative submission was that, on a fair analysis of what the defendant did, it fell into public law error in that it took irrelevant factors into account when inquiring into and deciding on the rate of return on capital to be applied when ascertaining the actual cost of care. In particular, she submitted that the defendant had clearly taken its own financial position (i.e. affordability) into account when ascertaining the rate of return on capital to apply when ascertaining the actual costs of care, and this was clearly impermissible. She also submitted that the same was true as regards the factors of benchmarking and the EIA, and that the defendant had failed to explain how the factors of capacity and commissioning intentions were relevant to ascertaining the actual costs of care.
52. I have addressed many of these points in the sections above on return on capital and the 2012 report.
53. First, for the reasons I have given I do not accept that the defendant was obliged to adopt an either/or approach, and find that it was perfectly entitled to adopt the hybrid approach which it did. In the circumstances of this case, which are fundamentally different from the circumstances in the Mavalon and Forest Care Homes cases, there was no public law obligation either to adopt the mathematical modelling approach throughout, or to provide a detailed and rational justification for not doing so.
54. Moreover, and in any event, the 2012 report clearly explained why the defendant had decided not to adopt the rates of return on capital included in the Chameleon and Laing & Buisson reports. In circumstances where it had not committed to use those reports, and in circumstances where in any event their opinion as to the appropriate rate of return on capital was not part of the modelling exercise as such, but no more than their own opinion as to the figure to be inserted into the modelling exercise, the defendant was perfectly entitled to depart from their suggested rates. An explanation for not accepting the Chameleon and Laing & Buisson figures was clearly given at [3.5.8], and insofar as the defendant needed to justify its explanation as rational, it did so in that section.
55. Further, it is clear from [3.5.8] and the report as a whole that the defendant had taken the decision as to which rate(s) of return on capital to use on the basis that it was a decision for it to take on the basis of its judgment, applying its expertise and experience. That was a perfectly justifiable approach in the circumstances, where it had decided not to accept the Chameleon or Laing & Buisson opinions, and where there was no other compelling "hard" evidence as to the appropriate rate of return on capital. It is quite clear, and I accept, that Ms Barlow was eminently well qualified, by reason of her professional knowledge and her experience and investigations in relation to costs in the care home sector in St Helens and surrounding areas, to make this judgment.
56. Importantly, I have already decided that the defendant was not obliged to undertake an entirely separate and standalone exercise of inquiring into and ascertaining all of the separate components of the actual costs of care, including therefore rate of return on capital, and then to go on, separately and subsequently, to consider whether or not to depart from those actual costs of care when setting the usual costs of care. All that the defendant had to do was to have due regard to the actual costs of care.
57. In this case, the defendant plainly inquired into, and did have due regard to, the actual costs of care as regards operating and capital costs, and the claimants do not have permission to contend to the contrary. The question as to the appropriate rate(s) of return on capital to be applied to the capital costs was not one which could be answered, or which the defendant was obliged to answer, by some precise mathematical exercise. The defendant did have regard to such evidence as was before it as to the rate of return on capital, and it cannot be said that it did not have due regard to that evidence, insofar as relevant to actual costs, because it had decided not to accept the Chameleon or Laing & Buisson opinions in that respect.
58. It is apparent from a proper reading of the 2012 report, in particular [3.5.8 – 3.11], that the defendant decided to set its usual costs of care by reference to rates of return on capital which it arrived at by an exercise of judgment and experience, taking into account all of the factors mentioned, which were all relevant to that question. It did not purport to, nor was it obliged, to undertake what would in any event have been a completely artificial exercise in the context of this case, namely to seek to ascertain some notional actual rate of return on capital and then to have regard to all of the other relevant factors when deciding what usual rate(s) of return on capital should be employed.
59. I am satisfied that the defendant was not obliged to set out in its report or decision some detailed justification as to the process by which, applying its judgment and expertise, it had arrived at the rate(s) of return on capital adopted, still less to state what its starting point had been from which it had arrived at the individual rates of return on capital employed. Ms McColgan makes the forensic point that in her witness statement Ms Barlow referred, at [25-30] to various criticisms she had of the Laing & Buisson approach, but that the "independent studies" she referred to in that part of her statement in fact demonstrated a more structured "weighted average" approach to ascertaining the rate of return on capital, which is completely absent from the defendant's decision and evidence. However, I am satisfied that this part of her statement is simply comment by Ms Barlow, as opposed to evidence that the defendant had purported to adopt a weighted average approach when producing its 2012 report, which it plainly did not so. I am also satisfied that the defendant never accepted at the time, nor has it done so now, that it was obliged to adopt some such or similar approach, or to explain and justify a decision not to do so. Therefore I place no weight on that point.
60. I am also satisfied that the defendant had plainly been able to demonstrate in 2014, by reference to the 2012 report, that the usual costs which it had set were sufficient to allow it to meet assessed care needs and to provide a reasonable level of care service without top-ups. Although there was some debate, on the basis of the evidence filed, as to whether the defendant was properly able to conclude as at April 2014 that this was the case by reference to the experience of the previous 2 years, I do not consider that this is a debate which I can, or should, resolve on the basis of the individual strands of evidence. The defendant was entitled to have regard to its own experience of what had happened in its area since then, in particular the absence of widespread provider failure [4.1.7]. It was also entitled to have regard to the absence of any response through the consultation from the majority of care home owners or other relevant parties to the effect that the usual rates were not sufficient to cover assessed needs or provide reasonable care services. It was also entitled to have regard to the results of its benchmarking exercise.
61. Finally, I am satisfied that in 2014, by reference to the factors identified in the 2014 report, the defendant was entitled to conclude that it was reasonable to stand by its approach of using the 2012/13 usual costs as fixed as a baseline figure for the following year. More specifically, I am satisfied that no significant further information had been provided such as would have caused it to conclude that it needed to revisit its approach to the appropriate rate(s) of return on capital to use. The limited financial information provided by the first claimant was not sufficient reason to do so; as Hickinbottom J made clear in Forest Care Homes at [47-49], a submission by an individual care home owner that it is unable to maintain its business on the usual rates set by the local authority will not, no matter how justified, in itself oblige the local authority to reconsider its decision.
62. In the circumstances I am satisfied that the challenge under grounds 1 and 2 must fail.

Ground 3

63. In the circumstances this ground also fails.
64. I should however also say for completeness that I am satisfied that there is no reasonable basis for criticising the defendant's fulfilment of its public sector equality duty. The EIA was detailed and comprehensive, and the report clearly demonstrated that the defendant had due regard to the equality implications of its decision, not just as a "back-covering" exercise but as a substantive exercise.
65. Finally, I record that Ms McColgan submitted that if it could be demonstrated that the defendant's approach to the assessment of actual costs was flawed, then it would follow that its performance of its public sector equality duty would also have been flawed, because its consideration of the risks and appropriate mitigating features would have proceeded on a flawed basis. I have not been asked to decide, and do not need to decide, whether that does necessarily follow and, in particular, whether even if the defendant had undertaken a reasonable information gathering exercise, it could not rely on a conscientiously undertaken impact assessment merely because it proceeded on the basis of a misapprehension of the actual position.

Relief

66. In the circumstances the challenge fails. I invite counsel to agree on the terms of the order and to seek to reach agreement on costs, failing which I will of course determine costs and any other matters arising at a further hearing, which I will be willing to hold by telephone if appropriate and if suitable arrangements can be made.
67. Thus there is no need for me to address the defendant's fallback submission that if the challenge had succeeded I should not quash the decision, but limit myself to making a declaration. The reasons are said to be: (a) the delay in bringing the challenge, in circumstances where it is the 2012 decision which is in substance challenged, and where the challenge relates to fees set for 2013/14, which were also used as the baseline for 2014/15 as well; (b) the adverse impact on the defendant and social services users who will suffer if the defendant has to increase the fees paid to care home users in challenging economic times; (c) the defendant will of course have regard to the declaratory relief when setting its fees for 2015/16.
68. Ms McColgan submitted that it would be wholly inappropriate to refuse substantive relief. She noted that the claimants had expressly disavowed any attempt to seek to quash the 2012 decision, and that as regards the 2014 decision: (a) it was not the claimants' fault that it had taken the defendant until April 2014 to make the decision for 2013/14; (b) the claimants had not acted in a dilatory fashion in launching and pursuing this challenge. It also seems to me that the defendant's submissions assume that the effect of quashing the decision would inevitably lead to a new decision which would substantially increase the fees payable to nursing homes for 2013/14 and 2014/15. However, since the challenge is to the process, not the substance, it does not seem to me that this would necessarily follow. If, as the defendant says, its decision is perfectly justifiable on the merits, then it would be both entitled and able to produce a further decision which did not alter, materially or at all, the rate of return on capital applied, and which would not be amenable to further judicial review challenge. In circumstances where the defendant was plainly aware from an early stage in the 2013/14 exercise that its decision would potentially be the subject of legal challenge, including a challenge on the basis now made, and in circumstances where the claimants are directly affected by the decision, I would have been most reluctant to refrain from quashing the decision had the challenge succeeded. However, since I need not make a final decision, I do not do so.

Note 1    See the more detailed explanation provided by Hickinbottom J in Forest Care Homes at [54-55].    [Back]

Note 2    I suspect that what the claimants’ solicitors meant to say was that if one totals all the individual rates and divides by the number of different types of home, one arrives at a mid-point of 4%.    [Back]

Note 3    See [2.1].    [Back]