Forest Care Home Ltd & Ors, R (on the application of) v The Welsh Ministers & Anor

The defendant council (“the Council”) is the social services authority for Pembrokeshire, and, as such it has an obligation under section 21 of the National Assistance Act 1948 to provide residential accommodation to those in its area who, by reason of age, are in need of care and attention not otherwise available to them. It does so in a variety of ways, including providing support in the community and through its own homes. However, to comply with its section 21 obligation, it mainly engages private residential care homes to which it pays a weekly fee for the provision of accommodation and care to those in relevant need. The fee is usually expressed on a per resident per week rate basis, and, in this judgment, given rates will be on that basis unless otherwise indicated. There are approximately 500 elderly people who are so accommodated in Pembrokeshire on the payment by the Council of such a fee.

The claimant companies (Forest Care Homes Limited, Mavalon Limited and Woodhill Care Limited) have common shareholders and directors, including the effective chief executive and manager of the companies, Mr Michael Davies, who is also the Chairman of the Pembrokeshire Care Home Owners (“the PCHO”), a trade association, the name of which is self-describing.

The claimants own and manage four residential care homes in Pembrokeshire, accommodating 87 people, 43 of whom are paid for by the Council. The average age of the residents in each home is over 86 years, and some are in their late 90s. All of the homes provide the accommodation and care to which I have referred. However, one is also a nursing home, i.e. in addition, it provides care by a registered nurse which, under different provisions (i.e. section 3 of the National Health Service Act 1977, and the NHS (Nursing Care in Residential Accommodation) (Wales) Directions 2004), is paid for, not by the Council, but by the relevant local health board. The residents in the nursing home have particular nursing care needs, and they include those who suffer from dementia and other mental conditions.

As I have indicated, about half of the residents in the claimants’ homes are paid for by the Council, the fee rate being fixed by the Council under the relevant statutory provisions. In this action, the claimants challenge various decisions of the Council in relation to the fee rate fixed for the year 2010-11. During the course of the proceedings the claimants’ case has evolved, but the challenges made fall under three broad heads.

First, the claimants seek to challenge the failure of the Council to make any decision setting a fee rate for the year 2010-11. The Council asserts that, following the collection of relevant data from care homes in Pembrokeshire, it made a decision to fix the fee at £390 per resident per week, prior to 7 May 2010, on the basis of a well-known economic model or toolkit, designed to ensure that an appropriate, fair and justifiable rate was set; and that that decision was communicated to the claimants, through Mr Davies, at a meeting on 24 June 2010.

Second, the claimants contend that, if a decision was made to fix the rate at £390, then that decision was unlawful; because it was irrational or, in the phrase used by Sedley J (as he then was) in R v Parliamentary Commission for Administration ex p Balchin (unreported, 25 October 1996) at page 19, “There is an error of reasoning which robs the decision of logic”. Indeed, Mr Charles Béar QC for the claimants identified six such alleged legal errors.

Five of these sub-grounds are in relation to the methodology used in the assessment of the costs of care home providers as follows.

First, the methodology failed to deal properly with capital costs (“the capital costs issue”). I will come on to deal with this sub-ground in detail in due course; but, during the course of the hearing before me, the Council accepted that the manner in which it had dealt with providers’ capital costs to arrive at the 2010-11 rate was wrong and unlawful, with the result that it conceded that the decision to set the fee rate at £390 should be set aside and a new decision taken. It also conceded that, as a result of that error, the claimants were entitled to be paid at a rate of £405.50, backdated to 1 April 2010: and, as I understand it, the relevant back-payment has subsequently been made. However, the claimants do not accept that that is the full extent of the legal errors in the methodology used by the Council to arrive at a rate, either in respect of capital costs discretely, or in respect of the other sub-grounds upon which they rely. Other than its concession, the Council denies any irrationality or illogic in its decision-making process that arrived at the figure of £390, now revised to £405.50. That is why this claim has proceeded to judgment, so that I can rule on the grounds remaining in issue and, if I find that any other legal errors were made, hopefully prevent the Council making similar errors in the new decision it is now bound to make.

The second sub-ground relied upon by the claimants in relation to the costs methodology, is that it failed to use appropriate local data on the average number of care hours spent on each resident per week (“the first staffing issue”).

Third, it failed to recognise that residents who require nursing care, for which the local health board is responsible, also require more non-nursing care for which the Council is responsible (“the second staffing issue”).

Fourth, it failed to take into account data from all care homes in Pembrokeshire, it being based upon data from only the larger homes, i.e. those with 20 or more registered places (“the smaller homes issue”).

Fifth, it was based upon costs data collected from the year 2008-9, and failed to take into account inflation in the two years to 2010-11 and the introduction of new Working Hours’ Regulations in April 2010 which increased the minimum holiday entitlement from 24 to 28 days (“the inflation etc issue”).

In response to each of those five sub-grounds, the Council submits that its methodology was appropriate and lawful.

The sixth sub-ground does not relate to the methodology used to assess providers’ costs; but rather that, in determining the rate on the basis of those assessed costs, it took into account the Council’s own limited resources which, the claimants contend, is an irrelevant consideration for these purposes. The Council contend that, in setting the rate, it is lawful to take account that factor, as it did.

Those are the six sub-grounds upon which the claimants seek to challenge the Council’s decision to set the 2010-11 fee rate at £390. They lie at the heart of this claim.

The third and final broad ground of challenge, also still in issue, is that the claimants contend that the Council acted unlawfully in taking steps to prevent them from seeking a contribution towards its costs from next of kin and others responsible for residents, over and above the fee set and paid by the Council. In response, the Council says that there is no relevant public law decision here that might attract relief in this court; and, in any event, that, by seeking such a contribution, the claimants acted in breach of their contracts with the Council and that therefore the Council was entitled to take the action it did to stop them.

The claimants’ application for permission and interim relief came before His Honour Judge Jarman QC on 9 November 2010. He granted permission in the following terms:

takes appropriate account of data from all providers of residential personal care in Pembrokeshire; and

takes account of legitimate current and future costs faced by all providers of residential care in Pembrokeshire as well as the factors that affect those costs.”

At the start of the hearing before me, there was debate about the scope of that permission, and the extent to which I should allow the claimants permission to proceed with a judicial review on grounds not pursued before Judge Jarman and/or on grounds which he had considered but upon which he had refused permission. There was certainly evidence before me that was not before Judge Jarman, as well as further submissions. Whilst not granting any permission wider than that granted by the judge on 9 November, I allowed the claimants to pursue all of the above grounds on the basis that I would deal with the grounds that fell outside that permission on a rolled-up basis, and I have heard submissions accordingly. I took that course to reserve the Council’s position on delay. For reasons to which I shall come in due course, delay is no longer maintained as a defence to the claim and, all grounds having been argued fully before me, I am satisfied that all are at least arguable; and I formally now grant permission on all remaining grounds.

However, before I come to the substance of those grounds, I shall deal with the relevant legal provisions and guidance upon which the grounds are based.

Section 21 of the National Assistance Act 1948 (as amended) provides:

Insofar as applicable to Wales, section 26(1) and (1A) provide that accommodation under section 21 may be provided by a private organisation that manages premises for reward, if the premises are a care home and the manager of that home is registered under Part II of the Care Standards Act 2000, which also empowers the relevant central authority – in Wales, the Welsh Assembly Government – to set standards for care homes generally, and to set conditions on individual registrations.

Section 26(2) of the 1948 Act provides:

As between the Council and the claimants, “the arrangements” referred to in section 26(2) were set out in the Council’s Residential Care Services Standard Contract entered into by the Council and each of the claimants, effective from 1 April 1999 for three years, but thereafter extended from time to time. This is an umbrella service contract, under clause 1(c) of which the Council and the provider are required to enter into an individual contract in respect of each placement (i.e. resident) made.

Each of the current service contracts, which are in similar terms, expires on 31 March 2011. Under that contract, the care services to be provided are set out in schedule 1, for which, by virtue of clause 1(b) of the contract, the Council is obliged to pay in accordance with schedule 2. By paragraph 1(a) of that schedule, the Council agrees to pay the rates set out in appendix 1 (at the date of the contract, £247.50 per week, for the category “very dependent elderly” into which all of the claimants’ residents now fall): and, by clause 8(c) of and paragraph 1(c) of schedule 2 to the contract, the Council may set the annual rate and alter schedule 2 accordingly on an annual basis. Paragraph 1(b) of schedule 2 provides that no additional payments for the service, over and above those set out in the schedule from time-to-time, “shall be made by the Council or the placement”. Paragraphs 3(c) and (d) provide:

These contractual provisions chime with guidance issued under section 7 of the Local Authority Social Services Act 1970 (to which I shall return in a moment), entitled “Guidance on the National Assistance Act 1948 (Choice of Accommodation) Directions 1993”. Paragraph 4 of that guidance applies where a resident explicitly chooses to enter accommodation other than that which the local authority offers, which is more expensive than the authority would usually expect to pay. It allows such placements, if a third party is willing to pay the shortfall or “top up”, on the basis that the authority will pay “its usual costs”. The guidance warns, in paragraph 4.3, that “… an authority must be able to demonstrate that this cost is sufficient to provide most residents with the level of care services that they could reasonably expect to receive if the option for … third party contributions did not exist”: i.e. third party contributions cannot result in an authority avoiding the financial consequences of its section 21 obligations or any part of them. Authorities are expressly told that they “must not encourage or imply that care home providers can or should seek further contributions from individuals in order to meet assessed needs” (paragraph 4.4). When such a third party arrangement is entered into, the authority is responsible for the full care and accommodation costs of the provider, and it must contract with the provider to pay the fees in full but it (the authority) can recover the contribution from the third party as income (paragraphs 4.6-4.7).

As I have said, the service contract is, in effect, an umbrella contract: and, for each placement, the Council and provider sign a Contract to Provide Residential/Nursing Accommodation and Care, which is specific to the particular resident. That individual contract is made expressly subject to the terms of the service contract. Reflecting the terms of that contract, it also says: “Pembrokeshire County Council scales of reimbursement for services are reviewed annually, and revised charges, if applicable, shall apply from a date in early April of each year”.

I now turn to government guidance, more generally.

By section 7 of the Local Authority Social Services Act 1970, in performing its functions, the Council must “act under” the general guidance of the relevant Minister or, in respect of a devolved function, the Welsh Ministers. Following guidance is not mandatory: but an authority can only depart from it for good reason. If it deviates from guidance without a considered and cogently-reasoned decision, it acts unlawfully and in a manner which is amenable to judicial review (R v London Borough of Islington ex parte Rixon[1997] ELR 66, especially at page 71; and R (Munjaz) v Mersey Care National Health Service Trust[2005] UKHL 58, especially per Lord Bingham at paragraph 21 and per Lord Hope at paragraphs 68 to 69). Sedley J (as he then was) encapsulated the proper approach to guidance in Rixon as follows:

The learned judge went on to insert a restriction on the authority’s ability to deviate from the guidance, namely: “… but without the freedom to take a substantially different course”. I hesitate to do anything but agree with that too, because of the eminence of (now) Sedley LJ as an administrative lawyer and the fact that the point is not going to be determinative in this claim: but it seems to me, as a matter of principle, Parliament has given the relevant decision-making power to the local authority and, despite the terms of section 7 of the 1970 Act, it would be open to an authority to depart even substantially from guidance if it had sufficiently compelling grounds for so doing. However, certainly, the more the proposed deviation from guidance, the more compelling must be the grounds for departure from it.

The provision of social services is, of course, a devolved function. The Welsh Assembly Government gave guidance in respect of commissioning care services in August 2010, “Fulfilled Lives, Supportive Communities: Commissioning Framework Guidance and Good Practice” (“the 2010 Guidance”), which replaced guidance issued in March 2003, “Promoting Partnership in Care: Commissioning across Health and Social Services (“the 2003 Guidance”).

The 2003 Guidance was operative until 11 August 2010. It is therefore relevant to any decision made by the Council in this claim in, say, May 2010. It is expressly “an enabling framework, leaving detailed decisions to be made locally” (paragraph 8.2). In other words, it sets out an approach to commissioning with which local authorities are required to comply in the manner I have outlined. The guidance marked (it said, in its foreword) “the beginning of a more positive partnership between the commissioners and providers of health and social care”.

The expressed objective of the Guidance was to achieve “real improvement and significant benefits for people using services and their carers” (foreword); and it stressed the paramountcy of “the well-being of people using services and their carers” (paragraph 3.1). However, it also noted the need for authorities charged with commissioning, to take account of the providers’ costs and the factors that may affect them, on the basis of good local evidence (paragraph 6.7); and it confirmed the need for those authorities commissioning care services to comply with the Wales Improvement Programme policy of Best Value, “that requires local authorities to balance cost and quality” (paragraphs 4.3 and 5.14). It also noted the importance of strategic planning of care services. Under the heading “Building capacity confidence and reducing instability”, it said:

The 2010 Guidance has been operative since 12 August 2010, and will consequently be relevant to any decision since then, including any future decision the Council is now bound to make in respect of the 2010-11 rate. It too is expressed in terms of being framework guidance, and confirms that the commissioning of care services remains “citizen centred”; but it is a much more substantial document, written at a time of greater awareness of the limited nature of public funds. The introduction indicates that

The Guidance also emphasises the importance of process which, it suggests, is causatively critical to good decision-making. Part 1 paragraph 1 says:

The 2010 Guidance is set out in the form of standards local authorities are expected to meet. “Commissioning”, as that term is used in the Guidance, includes both strategic planning, over a 3-5 year period, based upon an evidential foundation, with clearly specified outcomes, developed with stakeholders such as users, carers and providers, in the form of publicly available documents; and the conversion of those plans into effective services (standards 1-4, 8 and 12). Of the approach of local authorities to decision-making in the commissioning of social services, in what the Guidance describes as “difficult times”, the introduction says that, on the basis of good evidence:

the needs we are able to meet;

those we cannot meet together with the possible consequences;

the outcomes achieved; and

the effective use of resources.”

Under section 21 of the 1948 Act, where an authority has determined that a person has section 21 needs, it is bound to satisfy the minimum requirements of section 21 without regard to its own resources (see paragraph 46(2)) below). However, wherever an authority is required to exercise a discretion, this Guidance stresses the importance of that authority taking into account the consequences of its proposed decisions in relation to the services it is proposing to provide or withhold; particularly, the consequences for service users (in this case, the residents) but also for providers.

Standard 7 provides:

Standard 10 reads as follows:

The national or local economic environment may be making it difficult for some provider organisations to remain financially viable.

A requirement to improve the quality of services may put a short-term strain on resources.

The move to an outcomes-based approach may pose serious cultural as well as financial challenges.

Recognition of the need for service providers to be able to recruit employees with the skills and aptitudes necessary to deliver good quality care, to provide them with the training they require to obtain qualifications relevant to their duties and to facilitate continuing professional development to extend their abilities.

The need to re-train the workforce to respond to more up-to-date practices may have transition cost and service implications.

There is more than one reference there to the costs set for services being sufficient to enable providers to meet “all statutory requirements”. Those requirements are considerable. For example, I have already referred to the need for an independent provider of residential home accommodation and care to be registered under the Care Standards Act 2000 (paragraph 21 above). Under that Act and regulations thereunder (such as the Registration of Social Care and Independent Health Care (Wales) Regulations 2002, and the Care Homes (Wales) Regulations 2002), the Care and Social Services Inspectorate Wales (“the CSSIW”) has powers to inspect care homes and impose conditions upon the registration, e.g. as to specific levels of care staff who are to be on duty at any particular time. That is over and above the possibility of the imposition of criminal sanctions: for example, under regulations 18 and 37 of the Care Homes (Wales) Regulations, a registered person commits an offence if he fails to ensure suitable staff in appropriate numbers are working at a care home.

The CSSIW works on a local basis; and, for a variety of reasons to which I shall return in due course, it imposes some standards (e.g. for specific levels of care) on a local basis. In commissioning care services, understandably one might think, the Guidance requires a local authority to have regard to these requirements. I shall return to that when I deal with the ground of challenge to which it is particularly relevant (Ground 2(2) and (3): see paragraphs 120-131 below).

“Value for money”, as referred to in standard 10, is dealt with in standard 9, which requires that: “Directly provided and contracted social care services offer value for money and are fit for purpose”. The definition of “value for money” used is derived from HM Treasury Value for Money Guidance, as “the optimum combination of whole-of-life costs and quality (or fitness for purpose) of the goods or service to meet the user’s requirement. Value for money is not the choice of goods and services based on the lowest cost bid”. Value for money, standard 9 says, “balances quality, cost and effectiveness”; and “available resources” is one of the identified key components of commissioning.

Care service contracts are made between the Council and providers such as the claimants. Although, as described above (paragraphs 22-23), third parties may contribute to the costs of care, the resident (or “placement”, in the terms of the agreement) is forbidden from doing so. However, those who need care and accommodation by virtue of age are, by definition, vulnerable individuals. The guidance to which I have referred acknowledges that in terms of the well-being of residents being “paramount”, or the commissioning being “citizen [i.e. resident] centred”.

It is clear from the evidence and submissions I have heard that both the Council and the claimants are very sensitive to the needs of the elderly housed and cared for under these provisions. I appreciate that the claimants are commercial organisations, and that the Council has many other areas of responsibility, but nothing in the evidence suggests that either has anything but the well-being of the elderly and needy, who fall within the provisions of section 21 of the 1948 Act, at heart.

They are clearly right to do so. So far as the Council is concerned, it is a public body and, as such, where it makes a decision which may result in the removal of a vulnerable person from their home, with the potential associated stress, distress and adverse impact on his or her health, then that engages Article 8 of the European Convention on Human Rights; and removal may constitute an interference with those rights such that it will be allowed only if the removal is proportionate and justified in pursuit of a legitimate public aim (Watts v United Kingdom (2010) 51 EHRR SE5 (Application No 53586/09) at paragraph 97; and Manchester City Council v Pinner[2010] UKSC 45; [2010] 3 WLR 1441 at paragraphs 45 and 51-52). In making its decisions in relation to section 21, the Council is required to bear that in mind and make the appropriate proportionality balancing exercise where necessary. The claimants, as the owners of care homes in which the residents reside, have an interest in seeking to protect those Article 8 rights (Green Corns Limited v Claverly Group Limited[2005] EWHC 958 (QB)).

Those are the main legal provisions relevant to this claim, which highlights the tension between an authority’s obligation to provide the statutory services required of it on the one hand, and its fiduciary duty to those who provide public funds on the other – a tension identified by Auld J in R v Newcastle-upon-Tyne City Council ex parte Dixon, 20 October 1993, unreported but cited by Stanley Burnton J (as he then was) in R (Birmingham Care Consortium) v Birmingham City Council[2002] EWHC 2188 (Admin) at paragraph 32.

The following propositions, relevant to the determination of the issues before me, can be derived from the provisions to which I have referred, together with the case law to which I was referred.

The last point concerning the role of this court is important. The claimants have lodged a considerable amount of evidence to the effect that £390 per resident per week is simply insufficient to maintain their businesses as commercially viable concerns. In his 18 October 2010 statement, Mr Davies sets out in some detail the various actual costs the claimant has to bear, including for one of the companies (Woodhill Care Limited), the costs of servicing a £1.3 million bank loan with which the business was set up. Mr Davies indicates in that statement (at paragraph 127) that the bank is unwilling further to support the company, unless it becomes more profitable – specifically, unless it can demonstrate that it can service the loan and break even financially on the basis of an 85 % occupancy level – and that the bank would reconsider its position if the Council were immediately to increase its weekly fee per resident to £480.

Throughout the correspondence I have seen, the claimants suggest that, without a fee rate of £450 or £480, they are not financially viable and would be forced to close one, or all of the care homes they run. They suggest that that is likely to be an unfortunate or even devastating step for their residents, particularly as there are no other obvious available places in residential care homes in Pembrokeshire. They therefore express concern for both their own financial future and the future welfare of their residents. That was the basis of their application to Judge Jarman on 9 November, in the event unsuccessful, for interim relief in the form of an immediate increase in the fee rate to £480.

However, as I have indicated, Parliament has entrusted responsibility for providing care and accommodation to those who, through age, need it, to local authorities such as the Council – including the responsibility for setting a fee for the provision of such services. The relevant guidance makes clear that, in performing such functions, an authority must actively consult with and consider the consequences of its decisions for, amongst others, providers - particularly because the setting of a rate is in the context of contractual negotiations with them – but the rate is set by an authority in accordance with its statutory public functions, not by way of agreement between it and actual or potential providers. The rate having been properly and lawfully set, providers are entitled to contract for the provision of care services on the basis of that rate, or not to contract on that basis. That is a commercial decision for them.

It is my job only to review the legality of the Council’s decision – in effect, the legality of the Council’s decision making process. If the decision is unlawful and the error is material – and the Council now concedes it is on at least one ground – then I can refer the decision back to the Council to make the decision again, this time according to law. Unless I can be satisfied that there is only one rate that the Council could properly set (which, on the evidence before me, I clearly cannot), that is the only substantive relief I can give. It is the only substantive relief that the claimants seek. I cannot, even if I find the Council has acted unlawfully, give an opinion as to what an appropriate rate might be, yet alone require the Council to pay such a rate. I stress that, not because the sub-grounds to which I have referred seek to do more, but because I fear, from the evidence that has been lodged, that the claimants and others may not have fully appreciated the limited role of this court in such challenges as these.

So, as I have indicated, it is for the Council to set the fees payable to independent providers of care and accommodation. That has been so since 1993 and the implementation of the National Health Service and Community Care Act 1990, by which, save for various preserved categories, the funding of residential care homes passed from the Department of Social Services in central government to local authorities. The National Assistance Act (Choice of Accommodation) (Wales) Directions 1993 imposed the duty of determining the amount they would expect to pay for assessed needs on local authorities. From 2002, the preserved categories were abolished, so that local authorities became responsible for funding the placement of all in relevant need in residential care homes that fell within section 21.

Until 2008, the Council used a historical rate, increased annually to reflect inflation and similar factors. For the year 2008-9 that rate was £368.

For several years, providers (including the claimants) had complained about the rates for accommodation and care being paid by the Council. In November 2008, under pressure from the Welsh Assembly Government to set a rate on a principled and transparent basis, and from the owners of care homes and the PCHO who considered the current rate significantly too low, the Council agreed with the PCHO that an economic model should be used in the assessment of the fee rate: and, following internal discussions and external advice, on 8 December 2008, the Council decided to use the Laing model (Jonathan Skone 4 November 2010 statement, paragraphs 16-18.)

In April 2002, William Laing, an economist with the firm Laing & Buisson, prepared a report, “Calculating a Fair Price for Care: A Toolkit for Residential and Nursing Home Costs”, which, as its title suggests, incorporated a financial model or toolkit for calculating the reasonable costs of care in residential homes. In 2004, having been commissioned by the Welsh Local Government Association to prepare a report to update that toolkit and apply it to Wales, he prepared a further report, “A Fair Price for Care 2004: Wales”, with a revised model (“the Laing 2004 Wales report and model”). In the same year, he prepared a report with a model on broadly the same basis for England which was revised in 2008 (“the Laing 2008 England report and model”). Each model is accompanied by guidance notes as part of the report. The Council determined to use the Laing 2004 Wales model in the assessment of a rate for Pembrokeshire.

The models are in the form of a spreadsheet into which data on variable assumptions and parameters such as the number of hours, wages and costs of supplies are fed, under four cost heads, namely (i) staff, including employers own costs, (ii) repairs and maintenance, (iii) other non-staff current costs, and (iv) “capital costs (return on capital)”.

The populating of the model requires the collection, and then insertion, of relevant data which, once done, produces an appropriate rate for care and accommodation services provided by an independent provider per resident per week. However, the model presupposes that the full exercise of data collection and insertion into the model will not necessarily be done every year – for example, section 5 of the Laing 2004 Wales model proposes a method of adjusting fees in line with inflation – but the report suggests “recalibration” by reference to up-to-date data regularly, e.g. every three years (paragraph 5.1).

The Laing 2004 Wales model is designed to provide a “robust and transparent means of calculating the reasonable operating costs of efficient care homes… in any given locality in Wales” (paragraph 1.2, emphasis added); i.e. the model itself expressly recognises the importance of the workings of the model being available to those interested in it, particularly providers.

The Council considered that it did not have the appropriate in-house expertise to gather and deploy the relevant data into the model, and so employed Mr Christopher Hine of RSM Bentley Jennison, now RSM Tenon (“RSM”), a forensic accountant with a background in economics, to do so. Indeed, RSM had also advised the Council on the use of the Laing 2004 Wales model in the first place. Mr Hine sent out a survey form to each of the 35 residential care homes in Pembrokeshire, of which 24 were completed and returned. In the meantime, on 24 March 2009, the Council notified providers of an interim rate increase of 2.5%, from £368 to £377, payable from 6 April 2009.

Mr Hine produced a draft report dated 22 May 2009 that confirmed the basis of calculation of a rate for the provision of accommodation and services to the Council was on the basis of the Laing 2004 Wales model (paragraph 2.3). The report concluded that, on the basis of that model, populated with data RSM had collected, the fee level per resident per week for 2008-9 should be £390 as a standard fee but “for future years an incentive to improve standards would be set at a maximum of £25 over the standard fee” (executive summary). I shall return to that £25 in due course.

The report was discussed with, and explained to, the Council’s Chief Financial Officer and Director of Finance & Leisure (Mr Mark Lewis), and its Director of Social Services (Mr Jonathan Skone) at a meeting on 10 June 2009. Mr Lewis said that some concerns were raised in relation to capital cost adjustment, the new homes policy and the adoption of the efficient homes threshold criteria (29 November 2010 statement, paragraph 14): but Mr Skone said in his evidence that no significant issues apparently arose in that meeting. He had expected “a slightly higher fee rate”, but “careful questioning of RSM’s forensic accountant about the conclusions produced by the revised toolkit satisfied the Council that this was the right result” (26 November 2010 statement, paragraph 16). The evidence does not otherwise disclose the nature or subject matter of that meeting in respect of which there are no minutes or notes.

The final RSM report was produced on 24 June 2009 in similar form and with a similar conclusion to the draft. The Council accepted that recommendation, in the sense that it set the fee for 2009-10 at the level of £390, backdated to 1 April 2009.

The RSM report was not disclosed to the claimants at that time, nor indeed until after the permission hearing in this claim in November 2010. However, Mr Lewis and Mr Skone met Mr Davies on 24 June 2009, and Mr Davies expressed some concerns in relation to the capital cost adjustment and the exclusion of data from homes with less than 20 registered placements; but, although discussions between the Council and Mr Davies/the PCHO continued, the decision to set the rate thus was not formally challenged.

Because of the extent of the exercise involved, the Council expected that the full exercise would only be done every three years, as suggested in the Laing 2004 Wales report would be appropriate; but, again as suggested in that report, in the meantime, there would be an annual review to take into account any material variations in circumstances.

The first annual review was, of course, for the year 2010-11. The Council (particularly through Mr Skone) and the claimants (through Mr Davies) had in the meantime continued their dialogue. They had four meetings in 2009 after the fixing of the 2009-10 rate, which mainly concerned the rate and the additional pressures under which the claimants were working; and the claimants continued to press for further information about how RSM had populated the Laing model with data (see, e.g., the letter from the claimants’ solicitors to Mr Lewis of 24 December 2009). There was an abundance of consultation, although not all of the information requested by Mr Davies was provided. However, Mr Skone was unimpressed by the evidence produced by Mr Davies and “this combined with increasing financial constraints on the [Council], led the [Council] to conclude that there would be no increase to the level of fee for the financial year 2010/11” (4 November 2010 statement, paragraph 26). Mr Skone was the relevant decision-maker on behalf of the authority.

Unfortunately, there is no contemporaneous documentation with regard to when the decision was made or the reasons for it. Mr Skone accepted in his oral evidence that it would have been better had there been more documentation, which is clearly right. However, he said that the decision was taken before 7 May 2010, following discussions with Mr Lewis and, in reaching the decision, he took into account the following factors (29 November 2010 statement, paragraph 18):

Although this has now been overtaken by the Council’s concession to which I have referred (see paragraph 8 above), the date of 7 May 2010 derives from a letter, recently found on the Council’s computer system, from a Ms Angela Watwood (the Council’s Head of Community Care Commissioning, who works under Mr Skone) to care service providers. Under the heading, “Fee Reviews 2010-11 - Rates for Residential Care”, the letter reads:

However, the Council now accept that that letter was never sent to the claimants, or indeed to any other provider. In his oral evidence, Mr Skone explained that the letter was found on the Council’s system after 9 November 2010 (the date of the permission hearing before Judge Jarman) but before 28 November 2010 (when it was appended to Mr Skone’s statement as a letter purportedly sent to the claimants): but, upon further research, it appeared that the letter had been prepared on or about 7 May 2010 as a draft, but it was not sent out pending a meeting with Mr Davies and other members of the PCHO which, in the event, occurred on 24 June 2010. Mr Skone said that the Council’s practice was to meet with members of the PCHO to discuss the rate that had been set, before confirming the rate in writing to each provider. The letter was, he said, the written record of decision. Unfortunately, apparently due to an oversight, the letter for 2010-11 has never been sent out, either on 7 May or indeed subsequently. I accept all of that evidence.

The meeting on 24 June was attended by Mr Skone for the Council and Mr Davies and one other member of the PCHO. The gist of that meeting appears to be relatively uncontentious, except in relation to the certainty with which the rate of £390 had been finally fixed (see, in particular, Michael Davies 18 October 2010 statement, paragraph 116; and Jonathan Skone statement, 4 November 2010, paragraph 28). Mr Davies accepts that Mr Skone told him that “[the Council] had finished its cost-cutting review”, and he was not going to reduce the fee rate for 2010-11: Mr Skone explained that most of the Council’s services, including their own care homes, were having their budgets cut, but it was not the intention to cut the fees for independently run care homes. It was intended to keep the fees the same for 2010-11, as for the previous year. In his statement (at paragraph 28), Mr Skone said that:

However, the claimants still considered that issues remained between them and the Council in respect of the rate, and that the key to resolving those issues was for the Council to disclose documents that would enable the claimants to take an informed view as to the reliability of the RSM run of the Laing 2004 Wales model, prepared by Mr Hine in the Spring of 2009. The claimants’ solicitor (Miss Alison Castrey) wrote again on 7 July 2010, indicating that, if the information was not received, it would form the basis of an application to the court for disclosure. On 26 August, the Council’s solicitor responded saying that, “It is the Council’s view that commencement of proceedings at this stage is premature”; although, in fact, the letter refused to disclose any further documents. Some disclosure was made, following another trade of letters, on 17 September 2010. That prompted a letter before action from Miss Castrey, dated 8 October, more or less on the basis of the first and second grounds of challenge now before me.

In the meantime, there had been a further meeting, on 25 August, between Mr Davies and two other members of the PCHO, and Ms Watwood of the Council. Ms Watwood appears to have been surprised that a meeting without Mr Skone or Mr Lewis had been arranged, but she attended and kept full minutes. Those show that much of the meeting was concerned with the financial plight of the providers, including the claimants, as they saw it. They pressed for a rate of £480, alternatively £450. Ms Watwood says, and I accept, that she was not a decision-maker in respect of rates – that was Mr Skone – but she agreed to pass on the information given to her by Mr Davies and his colleagues. The minutes (at page 5) reflect that. The minutes also say:

At that same meeting, Mr Davies indicated that he proposed to set a fee of £480 per resident per week; and he proposed to write to third parties (next of kin and others responsible for residents) seeking a top-up of the fee being paid by the Council to that level. Mr Davies proposed produced drafts of letters at that meeting. The proposed letter to residents in respect of whom there were no existing third party contributions was as follows:

The proposed letters therefore indicated that the Council were failing to pay for services “to the required legal and contractual standards”, and sought from the third party an amount which the claimants had calculated met the difference between a rate paid by the Council and the sum needed to enable the required legal and contractual standards to be met. The payment of this top-up sum was to be a requirement of continued residence of the relevant resident at the claimants’ home, and was to be repayable to the third party only if and when the claimants were paid a higher rate by the Council. It is not suggested in the letter that the Council’s agreement had been sought for this course, nor does Mr Davies, either in his letter to the Council of 14 September or in his evidence prepared for this claim, suggest that it was.

The Council formally responded to that proposal by a letter from Ms Ruth Ewing (a Contracts Manager with the Council) dated 15 October 2010, indicating that the Council considered that any letter to a resident or a third party in the terms which had been suggested “could constitute a breach of contract”, and also expressing concern about the anxiety that such letters might cause to residents and those responsible for them. The letter requested that any contributions from third parties that had been received by the claimants should be repaid to the third parties who had made them. In fact, although unknown to the Council, the claimants had not sent out any letters seeking contributions by them. However, in ignorance of that, at about the same time in October, the Council wrote to the next of kin and others responsible for residents in the following terms:

Under such pressure form the Council, the claimants in the event did not send out any letters to any third parties seeking a contribution towards their costs, as a result of which no such contributions have in fact been made.

During the course of these events, the claimants attached the following note to every, or almost every, individual placement contract:

Those matters concerning the steps taken by the Council to prevent the claimants soliciting contributions from third parties are relevant to the third ground of appeal and I shall return to them when I deal with that ground (Ground 3: see paragraphs 146-152 below).

I now turn to the claimants’ grounds of challenge. Before I consider them in turn, two general points.

The first concerns the use of the Laing 2004 Wales model in setting the fee rate. Although the model was not re-populated with fresh data for the year 2010-11, the working of the model by Mr Hine in the Spring of 2009 formed the basis of the Council’s decision to set the 2009-10 rate at £390, and its decision to use the same rate for 2010-11.

As I have indicated, the Council determined – and also agreed with the PCHO – to set the fee rate for accommodation and care services provided by an independent care home by using the Laing 2004 Wales model. That model was designed by Mr Laing to produce a fair rate for the provision of care services, based upon an assessment of the reasonable costs of providers, if appropriate data were inserted into it. However, the model is the servant of the decision-maker in setting a rate, not his master. Within the parameters of the model, there must be a margin of appreciation available to the decision-maker in properly populating it with data. But, even though those parameters are designed to arrive at a fair fee rate, it is open to a decision-maker to deviate from the parameters of the model or the rate figure produced: although, given the nature of the model and the Council’s policy decision to use it, any departure would have to be for compelling reasons. Whether particular criteria on which to include data fall within or outside the parameters of the model is not a question which, in my view, necessarily warrants any fine judgment; because any criteria used must be capable of rational justification by the decision-maker. Most criteria will easily be justified on the basis of the model itself, and the Laing 2004 Wales report which supports them. They will not need any further justification. However, where the criteria the model demands are not inherently obvious, the data used may be justifiable and justified by reference to external criteria. In those circumstances, it is important that the authority makes a rational and reasoned decision to use a particular criterion in the context of the model it has adopted, and it is able and willing to share that reasoning with interested persons, including of course providers.

The second general point is this. In respect of each sub-ground relied upon by Mr Béar, he submitted that the criteria chosen in working the model were bad as a matter of public law as being irrational or so illogical as to rob the reasoning for the choice of those criteria of all force. In considering those submissions, I have been hampered by the lack of contemporaneous documents from the Council. There is no evidence that the Council had, or yet have, any strategic plan for the provision of care services in Pembrokeshire as advocated by the 2010 guidance. In respect of individual decisions, including the decision to fix the 2010-11 rate at £390, again neither are there contemporaneous documents nor is there any evidence that any such documents ever existed. There are no minutes or other record of the internal Council meeting between Mr Skone and Mr Lewis at which the rate was discussed. There is no record of Mr Skone making the decision after that meeting, let alone his reasons for doing so. There is no internal record of Miss Watwood being told of the decision, with a request, for example, that she prepares draft letters to providers informing them of that decision. There is no letter sent to claimants or any provider indicating what the set rate was, or, again, informing them of the reasons for that rate. There are no minutes of the 24 June 2010 meeting at which, the Council says, Mr Davies was informed of the Council’s final decision to set the rate at £390.

Mr Phillips submitted that, in relation to this claim, those matters are largely evidential. However, good administrative decision making and practice demands appropriate recording and communication of decisions made, and the essential reasons for them. Further, the evidential position for the Council does not get much better when one looks at the written evidence it has prepared and lodged for the purposes of this claim. In respect of the factual assertions it seeks to make good, that evidence is very thin. For example, in relation to Mr Skone’s reasons for fixing the rate at £390 for 2010-11, I have already referred to and quoted from paragraph 18 of his 29 November 2010 statement (paragraph 65 above). From that, in making the decision, it is clear that he had in mind the budgetary constraints on the Council: indeed, they appear to be listed as the only considerations that he had in mind when making the fee rate decision.

With regard to other factors that he clearly ought also to have had in mind, Mr Phillips relied heavily upon paragraph 28 of Mr Skone’s earlier statement dated 4 November 2010, in which he says that he told Mr Davies at the 24 June meeting that he did not intend to apply the cut which had applied to the Council’s own homes to the fee rates for independent care homes because: “I did not consider it to be practical or sustainable to reduce the fee level to the private care homes sector to reflect the decrease in the [Council’s] care homes and as a result the fee level remained at £390 per week.” But that is the only evidence the Council has which suggests that Mr Skone, in setting the rate, had anything else in mind other than the budgetary constraints on the Council. That is but one example of the lack of substantial evidence in relation to the Council’s decision-making process, to which I shall return as I deal with the specific ground of challenge.

There may be an assumption, in some circumstances, that an authority has acted lawfully: but, where it has apparently acted in deviation from governmental guidance to which it is subject and the parameters of an economic model for the assessment of a fair rate which it has adopted, any such assumption must give way. These matters to which I have referred may be, as Mr Phillips submitted, essentially evidential; but the absence of documentary records makes it more difficult for an authority to show that it has taken decisions in a rational and reasoned way, having taken into account all relevant factors. That is why, as I have said, good administrative practice demands that decisions, including essential reasons for decisions, are recorded.

I now turn to the specific grounds of challenge upon which the claimants rely.

First, the claimants seek to challenge the failure of the Council to make any decision setting a fee rate for the year 2010-11.

There is a factual dispute between the parties as to whether (and, if so, when) such a decision was made. The Council asserts that it made a decision to fix the fee of £390 per resident per week prior to 7 May 2010, and that decision was communicated to the claimants through Mr Davies at the meeting on 24 June. The claimants’ second broad ground, to which I shall come in a moment, challenges the legality of that decision, if made. Because the Council now concedes that that decision, if made, was erroneous in law, requiring the matter to be reconsidered by the Council and a new decision made, the first ground of challenge has become substantively empty. Further, the Council also relied upon the facts and matters that founded its defence to the first ground – notably, that a decision to set the rate was made and communicated to the claimants by 24 June 2010 – to contend that the claimants had failed to challenge the decision to fix the rate at £390 within three months of the relevant decision or promptly, and they should not be granted the necessary extension to bring it now. Given its concession, as I have already noted, the Council properly no longer relies upon any alleged delay by the claimants in bringing this claim.

For those reasons, it has become unnecessary for the claimants to rely upon this first ground of challenge. However, as it may be relevant to subsidiary issues such as costs, I should say that I see compelling force in the ground.

Mr Skone says that, at some time before 7 May 2010, he made a decision fixing the 2010-11 rate at £390. However, the date he used was based upon the premise that, that day (7 May 2010), the Council sent a letter to all providers, including the claimants, informing them of the setting of that rate. However, as I have explained (see paragraphs 66-7 above), Mr Skone has subsequently accepted that that letter was never sent; and the Council’s usual procedure, he said, was to have a meeting with a few members of the PCHO to discuss the rate that was being set before a letter was sent to each provider informing them of the set rate for the year. He frankly accepted that it was the letter that stated the fee that would be paid: it was, he said, “the written record of the Council’s decision”. There is, as I have already pointed out, no other such record, either internal or sent to providers. It is also noteworthy that, under the contractual provisions between the Council and the claimants, any fee rate remains in place unless and until a new rate is set by the Council.

Further, the evidence as to what was said at the 24 June meeting does not persuade me that Mr Skone made it clear to Mr Davies that a final decision had been made in relation to the 2010-11 rate, in the sense of a decision that could or would not be reviewed on the basis of additional information from the claimants. Further information and representations were indeed thereafter made by Mr Davies, and Ms Watwood indicated on 25 August that the rate would be reconsidered in the light of the further information that had been provided to her. Mr Davies said that he did not consider the final fee set without receiving a letter to that effect, as he had done in previous years (7 December 2010 statement, paragraph 3.2). There is, of course, no suggestion that the decision has been notified to any of the many providers not attending the 24 June meeting. Mr Skone frankly said that the reason no letter notifying providers of the set rate was that this had simply been overlooked.

The importance of proper notification of a decision is not a technicality: it is a fundamental constitutional principle, important to trigger an individual’s right to challenge that decision in the courts (R (Anufrijeva) v Secretary of State for the Home Department[2003] UKHL 36; [2004] 1 AC 604 at paragraph 26, per Lord Steyn). The correspondence following 24 June meeting (referred to in paragraph 67 above in the review the factual background to the claim), does not indicate that that right had arisen. It suggests that, even if and insofar as Mr Skone had decided that the rate ought not to be increased, the Council was prepared to consider the rate further in the light of new information and representations made by the claimants. For example, there is what Ms Watwood said at 25 August meeting (see paragraph 68 above). The Council’s solicitor wrote to a Miss Castrey on 26 August saying that the Council considered the commencement of proceedings would be premature, and Mr Skone wrote to Mr Davies on 8 September saying that “no decision on the basis of the new material can be made without the populated toolkits” (i.e. the Laing 2004 Wales model, populated by data which the claimants considered were appropriate).

Given the Council’s longstanding practice of communicating the rate set by letter to each of provider, the nature of the rate discussions between the Council and the claimants (which Mr Skone understatedly described as “informal”), and the evidence of the content of the 24 June and 25 August meetings I have described (see paragraph 68 and following above), had it been necessary for me to consider the issue, I would not have been satisfied that a final rate decision by the Council had been properly notified to the claimants; and that, in failing to make a properly notified rate decision, the Council had erred in law. That is my view of the merits of the first ground. However, given the Council’s concession in relation to the second ground, I formally refuse the application on ground one.

The second ground is more substantive. I will deal in turn with each of the six sub-grounds that Mr Béar identified (and set out in paragraphs 6-15 above).

I deal with the capital costs issue first because Mr Laing described the manner in which RSM approached capital costs to be “the most important source of discrepancy between its view and [Mr Laing’s own] view of reasonable care home costs” (3 December 2010 report, paragraph 29); and, as I have indicated (paragraph 8 above), the Council now accepts that the manner in which it dealt with capital costs was wrong and unlawful, and that requires it to reconsider and re-determine the fee rate for 2010-11 - although it does not concede that it was wrong to the extent alleged by the claimants.

As I have already described (paragraph 55 above), in calculating the costs of a provider, the Laing models include provision for a rate of return on capital. The way that is done is that, for the purposes of calculating the true costs of providers, a reasonable rate of return on capital for those investing in care homes over time is calculated by reference to a percentage of the capital required to acquire or set up the business; and that is then added to the other revenue costs. The reasonable percentage return fell from 16% in 2002 to 14% in 2004 (see the Laing 2004 Wales report at paragraph 1.3). It was common ground before me that the appropriate percentage rate at all relevant times for the purposes of this claim was 12%. For this court, Mr Laing (who was retained as an expert by the claimants) explained that “capital costs” were calculated to include

In terms of valuation of that capital requirement, leaving aside the land (the valuation of which is low and uncontentious for the purposes of this claim), the model values the capital invested in terms of buildings and equipment meeting current “national minimum standards”, adjusted downwards by a “capital cost adjustment factor” to reflect the extent to which a home does not meet such standards.

By way of explanation, under the provisions of section 23 of the Care Standards Act 2000 and the Care Homes (Wales) Regulations 2002, in 2002 the Welsh Assembly Government issued the national minimum standards for care homes for older people, which were revised in 2004. Those set general standards for care homes in Wales. Section 8 sets various minimum standards for “the physical environment” (“PE standards”) in care homes and extensions built in Wales and registered after that date. The standards relate to such matters as shared facilities, en suite facilities and space requirements. Homes that were built and registered before 22 April 2002 do not have to comply with those standards (although, in some respects, they may have to comply with earlier and generally less onerous standards). As I understand it, over time, the standards for those older homes have increased, with the intent that, eventually, all homes will have to comply with the same higher PE standards. That is in line with Government policy to improve standards for those who are in residential care homes to which I have already referred (paragraph 34 above).

Therefore, all homes must meet the lower, pre-2002 PE standards; but full payment under this head of costs is determined by the extent to which a home, whenever built, meets the new, post-2002 PE standards. As the guidance notes to the Laing 2008 England model state (at page 33):

In respect of assessment of the appropriate provision for return on capital, this is dealt with on a single sheet in the RSM’s Spring 2009 working of the Laing 2004 Wales model, with one page of back-up calculations. Although Mr Lewis indicated that capital costs were discussed at 10 June meeting he had with Mr Hine and Mr Skone, there is no evidence that, prior to making its decision as to fee rate based on the cost assessment, Mr Skone had any further explanation other than that which is on those pages; and any rationale must consequently derive primarily from them.

The main calculation shows an aggregate figure of £121 taken for the capital costs of land (£11) and buildings and equipment meeting the minimum standards for post 2002 homes (£110). Those figures are uncontroversial. Shown then is a deduction of £73, under the heading, “Maximum capital cost adjustment factor for homes not meeting physical standards for ‘new’ homes”. As appears from both that description and the back-up calculation, this figure is calculated on the basis of the per placement “floor” or base value of care home premises that comply with the PE standards for pre-2002 care homes, which comply with none of the post-2002 standards, i.e. they are compliant with the lowest possible PE standards. In other words, RSM took the maximum possible downward adjustment for homes not meeting the post-2002 PE standards, by taking, as the comparator, homes which met none of those standards.

Deducting that figure of £73 from £121, the calculation arrived at the figure of £48 for what the model describes as, “Total capital costs”. That is then added to the figures for the other categories of cost to give a total figure of £415, described in the RSM worked model as “‘Target’ fair market price for homes meeting all standards for ‘new’ homes…”. From that, RSM deducted £25 representing (their working model indicates), “Incentive for homes meeting standards within the County (shown at 100%)”; which gives £390 for “‘Floor’ fair market price for homes which do not exceed the interim physical standards for ‘existing’ homes in National Minimum Standards…”. It is that figure of £390 which RSM recommended and the Council accepted be used as an across the board rate per resident per week in any Pembrokeshire care home, irrespective of the extent to which a particular care home betters the PE standards for pre-2002 homes.

However, during the course of the hearing, Mr Phillips indicated that, on reflection, Mr Hine accepted a number of errors in that calculation which the Council no longer sought to justify. The errors were as follows.

First, he accepted that the figure of £73 for the capital cost adjustment factor, representing the discount for homes meeting the minimum pre-2002 PE standards but none of the post-2002 standards, was wrong. He accepted that the approach used in the Laing 2008 England model should be used, namely that the “floor” for those homes that met none of the post-2002 standards should be 50% of the “ceiling” set by the homes that met all such standards. In this case, that would be 50 % of £110, or £55.

Second, Mr Hine said that the terminology that he had used in the latter part of the calculation was also wrong. It did not reflect the substance of the methodology he had used.

He said that he had added the capital costs for those homes that met only the minimum pre-2002 PE standards to the other revenue costs in the model, to obtain a figure for “Target fair market price for homes which do not exceed the interim physical standards for ‘existing’ homes in the National Minimum Standards for Care Homes for Older People (Revised March 2004) but which meet [the Council’s] quality of care standards”, i.e. homes that met the minimum PE standards, but the highest non-PE care standards. That, exchanging the figure of £55 in the calculation for £73 for the reasons I have already given, gives a figure of £433.

However, Mr Hine took the view that “the capital cost adjustment factor reflects both the physical state of the care home and the quality of care (the ‘non-physical standards’)” (16 December 2010 report, paragraph 5.2), i.e. that the capital costs include an element that reflects the extent to which a home complies with the standards expected other than PE standards, and particularly the standards of care. He estimated that proportion to be 25%. He consequently reduced the £433 figure by a further 25 % of the full £110 (i.e. by a further £27.50), to arrive at the figure of £405.50: but, on the basis that the Council would instigate a means of assessing the extent to which homes complied with the highest non-PE care standards and reimburse providers with that £27.50 to the extent that there was compliance. Therefore, dependent upon a provider’s compliance with those care standards, the fee rate for 2010-11 would be in the range of £405.50 to £433.

The Council conceded that it had erred in law in setting the rate at £390 rather than £405.50; and further in failing to implement a scheme of assessment of standards of care in homes, meaning that homes with the highest standards were being deprived of £27.50 per resident per week – and all other homes were being deprived of pro rata payment in respect of care standards, and the incentive to better standards of care in their homes.

However, otherwise, Mr Philips submitted that the approach of Mr Hine was justified, if the Council had a policy of incentivising better standards of care in homes, but of not incentivising better PE standards. There was no evidence that that was the Council’s policy – as I have indicated, I had before me no evidence of any particular strategic policy of the Council in relation to the provision of care services, nor indeed that the Council had any such strategic policy at all – however, Mr Phillips submitted that I could and should assume that the Council has had, at all material times, such a policy of differential incentivisation: and, on that basis, the approach of Mr Hine and the Council which has adopted it, is therefore lawful.

Those submissions were, as ever, very ably put by Mr Phillips – they could not have been better put – and boldly and bravely put too. Unfortunately, in my judgment, they do not withstand any sensible scrutiny, and certainly not the overwhelmingly compelling submissions of Mr Béar. He submitted that the submissions fell at not one but every hurdle. That seems to me to be about right.

First, Mr Hine’s calculation is based on the premise that the Council has a policy of encouraging higher standards of care, but of not encouraging higher PE standards in care homes. However, there is no evidence at all before me that that is Council policy: and the evidence that I do have, thin as it is, suggests that that is not its policy. It was the Council that determined to use the Laing 2004 Wales model which seeks, in line with Welsh Assembly Government policy and guidance, to incentivise homes that are not at post-2002 PE standards, to obtain those higher standards. In his calculation, Mr Hine himself refers to the older pre-2002 PE standards as “interim”, reflecting the intention of the Government to raise such standards to the post-2002 standards over time. I would be reluctant to find that it was the Council’s policy to have the same floor or base rate for all care homes, irrespective of the actual extent to which they comply with the post-2002 PE standards, because, as well as not offering any incentive to enhance their facilities, as Mr Béar pointed out, there would be every commercial encouragement for homes with higher PE standards to leave the market – because the capital return for them would be relatively less than that for a home with lower standards. It would take compelling evidence to persuade me that that was indeed the intended policy of the Council.

Given that the evidence that I do have suggests that it is Council policy to encourage such betterment and there is certainly no evidence before me that it is the Council’s policy not to do so, and that a policy to discourage or not to encourage providers from raising the physical environmental standards of their homes would deviate from Welsh Assembly Government policy and guidance the Council is bound to follow, unless it has compelling grounds to deviate, there is no basis upon which I could make the bold assumption Mr Phillips pressed me to make, namely that the Council has a policy not to encourage providers to enhance the PE standards of care homes. There are no such compelling grounds.

In any event, second, Mr Hine does not appear to have acted on any such assumption. He appears to have worked on the basis that the Council wished to discourage the building of new homes, rather than not to encourage existing homes to raise their PE standards towards the post-2002 level. That is the indication in his contemporaneous report. In the report upon which the rate decisions were made by the Council – I have 22 May 2009 draft, but I understand the final report was in the same form – he said:

I pause there to note that that is, of course, wrong. Although the valuation of capital costs is based on business set up or acquisition, as I have explained, the inclusion of “capital costs” in the assessment of a provider’s costs is to ensure that a return on capital is properly reflected. The better the PE standards (whether as a result of new build, or older homes that in fact comply with the new standards), the higher the assumed capital costs should be. Such costs are real, if only because, if money was not invested in care homes, it could be invested elsewhere. The methodology for the calculation of capital costs does not become inappropriate simply because an authority wishes to discourage new build, or even if it wishes to discourage enhancement of PE standards in older homes. For example, there will be homes that now comply with the highest PE standards that should be entitled to the highest level of capital costs on the basis of this model. Continuing with the quotation:

That is what the Council had before it. There is no evidence of any further explanation. Those passages on their face suggest that the calculation has been based upon the premise that the Council wished to encourage raising standards (at least including PE standards), but does not wish to encourage new build. That it did not seek to discourage enhancing PE standards in existing homes appears to be consistent with both the evidence of the Council’s own intention, and the Welsh Assembly Government Guidance which seeks to promote such improvements.

Third, whereas there is, of course, nothing wrong with an authority including a separate monetary incentive to providers to increase their non-PE standards of care, the manner in which Mr Hine approached this was, in my judgment, based upon a misunderstanding of capital costs and consequently it lacked rationality.

Mr Phillips said that capital costs included an element that reflected the extent of a provider’s compliance with non-PE care standards: and, as an incentive to comply with those standards, it was rational to withhold that element if, and insofar as those standards were not met – as Mr Hine had done. He referred me to the following passage at paragraph 4.4.2.4 on page 41 of the Laing 2004 Welsh report, particularly relying on the last sentence:

I do not consider that Mr Phillips’ submission has any force. “Capital costs”, as I have explained, concern ensuring that a provider’s costs include an appropriate return on capital, and are calculated by reference to the capital costs of setting up or acquiring the business. Within that calculation, there is no element referable to compliance with non-PE standards of care, nor could there be. Compliance with non-PE standards may require revenue costs, but no significant capital costs. That is why the calculation of such costs focuses exclusively on the extent to which buildings etc comply with various standards for the physical environment or premises themselves. Mr Béar submitted that the 25% figure chosen by Mr Hine for this deduction was arbitrary. In my view, any figure would inevitably be arbitrary, because no part of capital costs is rationally referable to non-PE standards of care.

There is nothing in the Laing 2004 Wales report or model to suggest the contrary. The passage I have quoted, upon which Mr Phillips relied, is clearly focused on how compliance/non-compliance with PE standards can most appropriately be dealt with in the model: although, understandably, it is proposed that high non-PE standards should be a precondition of obtaining the higher levels of capital costs. That is suggested in paragraph (d) on page 43 of the Laing 2004 Wales model:

I fully accept that it would be open to an authority to incentivise the raising of non-PE standards of care in some way. The Laing 2008 England model suggests one way, namely that the floor for capital costs based upon PE standards should be half the ceiling – and then making any allocation within that range conditional upon particular non-PE care standards being maintained. However, that is, of course, a very different logical approach from that adopted in this case. In working on the basis that there is an element of capital costs representing the difference between minimum and maximum non-PE care standards – which can be allocated on the basis of extent of compliance with such maximum standards – Mr Hine did not, in my judgment, adopt a logically defensible or legally rational approach.

For those reasons, as well as the matters conceded by the Council, I consider the approach adopted by the Council in relation to the assessment of provider’s costs for the purposes of setting the fee rate to have been unlawful.

I can deal with two issues, both related to staffing, together. They are financially important, because wages are the largest component of running costs for any care home.

In populating the Laing 2004 Wales model, in terms of levels of care, RSM (i) used benchmark figures, as opposed to figures derived from the local data they collected; and (ii) did not differentiate between the levels of non-nursing care required by those residents who required nursing care and those who did not. Mr Béar submitted that (i) using local data would have led to a figure of 24.22 hours of care staff per resident per week, as opposed to the 22 hours used in the model; and (ii) it is well recognised that those residents who require nursing care also require a higher level of non-nursing care, a differential that ought to have been reflected by a higher level of non-nursing care hours being allowed in relation to residents who needed nursing care.

Mr Phillips provided a single response to both. He submitted that levels of care were not subject to significant geographical variation, and hence national benchmarks were appropriate; and, whilst accepting that those who needed nursing care also required higher levels of non-nursing care, the full non-nursing care needs of residents who required nursing care were catered for in the RSM workings by their use of the non-nursing care benchmark figure for “elderly mentally infirm” residents (or “EMI”) in the Laing 2008 England model, for all residents across the board in Pembrokeshire. EMI have the highest care needs.

I accept that actual levels of care in terms of non-nursing hours cannot be determinative of the reasonable hours that an authority should pay for on a cost basis. That would only be an encouragement for providers to use staffing ratios that are higher than are necessary to give residents appropriate levels of care under section 21. I also accept that levels of care in terms of non-nursing hours for a similar profile of residents is less likely to vary geographically than, say, rates of pay. However, I do not accept that care staffing levels are completely immune from local variations.

First, the level of hours of non-nursing care may vary from place to place as a result of historical factors. Local authorities were responsible for setting such levels of care until 2002, when the regulator under the Care Standards Act 2000 (now the CSSIW) took over. As a result, there were historical geographical variations, which have not been entirely moderated. Before 2002, the Council had amongst the highest levels of staffing ratios in Wales (see, e.g., the Council’s Social Service Department Policy and Procedures for the Registration of Homes for Elderly People 1993, especially at chapter 4), which have since been maintained. The current staffing ratios used by the claimants are those that were applied by the Council pre-2002 (Michael Davies 29 November 2010 statement, paragraph 4).

Second, the evidence before me was that, after 2002, the CSSIW have been reluctant to sanction any reductions in staff resident ratio. Mr Davies said:

In the Laing 2004 Wales report (at page 22), it is said that the staffing standards currently being applied by CSSIW “vary across Wales as a consequence of the decentralisation of regulation prior to April 2002 and the discretion allowed to inspectors.” Mr Laing said in his 3 December 2010 report for this claim (at paragraph 2):

There was no compelling evidence to the contrary before me, Mr Hine relying upon other passages from Mr Laing’s works which set out the reasons for the general practice of using benchmarks for staffing levels. I do not find those passages inconsistent with the evidence I have quoted, which I accept.

Third, the importance of taking account of local staffing levels is recognised elsewhere by Mr Hine himself, who used figures for domestic staff derived from the data collected from Pembrokeshire, rather than the Laing 2008 England benchmark, which would have been higher (Mr Laing 3 December 2010 report, paragraph 22).

Therefore, whilst national benchmark staffing levels may be an appropriate starting point, an authority must at least consider whether any local factors militate against the use of a particular benchmark in particular circumstances. In this case, the Council had evidence that they may. In any event, the Council had evidence (collected by RSM) that the actual levels of care were higher than those for which the Council proposed to include in the costs assessment model, and a reduction in staffing levels could have an adverse impact on residents. The Council was therefore bound to take into account the potential adverse consequences for residents before setting a rate on that basis. There is no evidence that it did.

It is no answer to that complaint (as suggested in Mr Hine’s 15 December 2010 report, at paragraph 4.18) that the benchmark used for all residents was the EMI benchmark in Laing 2008 England model, which was of course higher than the benchmarks in that model for either ordinary residents or those with lesser nursing needs. That simply makes it more likely that the benchmark used by RSM was reasonable – but does not overcome the failure of the Council to take into account local factors of which it was or ought to have been aware.

I conclude that the methodology relied upon by the Council failed properly to deal with staffing costs. In failing to consider local factors, the Council erred in law.

It is uncontroversial that a significant proportion of the care homes in Pembrokeshire are relatively small (under 20 registered places); and that smaller residential care homes, even if run competently, are inherently more likely to cost more per resident per week to run, because they lack the economies of scale. In that sense, they are economically “inefficient”. Mr Laing accepts that, as a matter of principle, it is wrong to reward such inefficiency, and therefore it is in principle open to an authority to restrict its selection of relevant data to larger homes (the Laing 2004 Wales report, paragraph 3.4; and his 3 December 2010 report for this claim, paragraph 9). RSM restricted collection of data to those homes with 20 or more registered beds. Mr Laing accepts that such homes would benefit from economies of scale and that a home with at least 20 registered places is an acceptable definition of an economically efficient care home (3 February 2010 report, paragraph 2).

However, Mr Laing again indicates that local circumstances may override this principle or benchmark. In the Laing 2004 Wales report (at page 10), he accepted that higher prices for small scale homes may be justified by an overriding factor “such as preservation of otherwise uneconomic smaller homes in isolated rural communities”. In his 3 December 2010 report for this claim (at paragraph 6), he confirms that:

Where, as in Pembrokeshire, a significant proportion of residential homes are small and population is sparse, setting a fee rate on the basis of homes that may benefit from economies of scale, may have the effect of putting smaller homes out of commercial business, which may result in residents being moved. That move may be to a less convenient home in the area (e.g. less local for the resident), or even, where places in homes in the area are generally occupied, movement out of the area altogether.

In the case of Pembrokeshire, the Council was aware that a significant proportion of homes are small, the occupancy level is very high and providers have been expressing concerns about the fee rates in the context of their business. In the circumstances, the Council, if determined to set one rate for all homes large and small (as it was: see Mark Lewis 4 November 2010 statement, paragraph 6) ought to have taken into consideration the local circumstances, and the possible consequences to providers and residents of setting a fee rate based upon only those homes which benefited from the economies of scale. There is no evidence that it did so.

In the circumstances, I consider that, in this respect too the Council’s methodology was unlawful (although whether the claimants, who only own and run larger homes, would have been entitled to relief on this sub-ground alone, might be a matter for debate).

The decision that the 2010-11 fee rate should be £390 was of course based upon the RSM working of the Laing 2004 model, which was itself based upon data collected from care homes in Pembrokeshire in February 2009. Mr Béar submitted that the Council erred in failing to take into account inflation, or the recent changes in the Working Time Regulations which increased the minimum holiday entitlement from 24 to 28 days and which is effective from April 2010. Mr Hine accepts that these two matters should be taken into account when calculating future year fees (15 December 2010 report, paragraph 6.8).

In my judgment, the same failure in approach by the Council as I have identified with other sub-grounds has occurred in relation to this. Subject to the manner in which it took into account its own finances, with which I shall deal shortly, it would, in my judgment, have been open to the Council to have taken the view that no increase in rate ought to be made, although the effects of inflation and any change in the Working Hours Regulations would have meant that this was, in real terms, a cut in the fee rate. However, such a decision could only be made on the basis of proper consideration of its effects on the provider and/or residents. Before making such a decision, the Council should have considered possibly adverse consequences for both. Would inflation, in whole or in part, have been borne by the provider out of its profits? If so, given that the Council worked on a profit margin of 5%, then inflation over a year of over 2% would clearly be significant. On the other hand, if the real cut would have been reflected in a loss of service to the residents, were those consequences acceptable in terms of proportionality? Those are just two of the potential consequences the Council ought to have had in mind.

On the evidence, it had no such consequences in mind at all. There is no evidence that it had any consideration of any potential consequences for residents. The evidence that it had providers in mind is restricted to the sentence in paragraph 28 of Mr Skone’s statement of 4 November 2010, which I have already quoted (paragraph 68 above):

Given that the RSM calculation calculated the appropriate costs of care that ought to be reimbursed, before making the important and difficult decision as to the 2010-11 rate, the Council was bound to consider the potential adverse effects for providers and residents of setting fees below that “fair and appropriate” rate in real terms. There is no evidence that it did so. Again, that failure was an error of law.

I can deal with this ground shortly.

Mr Béar submitted that, in fixing the fee rate, the Council could not lawfully take into account at all its own resources, and in particular the financial constraints under which it was working; and that it erred in doing so. For the reasons I have already given (paragraph 46 above), I cannot accept that submission in its extreme form. As well as in the decision as to which the persons it should extend section 21(a), the Council is entitled to take into account its own financial position when exercising its discretion as to the manner in which and the standard to which such assistance is given, provided that the minimum requirements of section 21 are met. That is clear as a matter of principle. It is that to which Stanley Burnton J referred in the Birmingham Care Consortium case (cited in paragraph 46 above), when he said (at paragraph 31):

However, when exercising its discretion in a manner which is adverse to an interested party – e.g. in this context, a provider or resident – the Council’s own financial position is of course not necessarily determinative. It is bound to take into account and balance all relevant factors; and in particular it is bound to balance such matters as the quality of the service it provides and the need to maintain stability in the care services sector on the one hand, against the resources with which it has to provide that service on the other. The interests and rights of residents are of particular weight in that balance. The 2003 and now 2010 guidance makes them so, as does Article 8.

In my judgment, the Council was fully entitled to take into account its own financial position when determining the level of accommodation and care services upon the minimum required by section 21, and in setting the fee rate for those who provide those services. However, it erred in law in failing properly to take into account other factors which I have identified in this judgment, such as the potential adverse consequences of the decision for providers and residents, which it was required to balance against the constraints on its own resources. The manner in which the Council dealt with capital costs for the purposes of setting the rate was simply methodologically wrong; but the other sub-grounds succeed, because the Council failed to take into account matters other than its own financial resources in a proper and lawful way.

For all of those reasons, as well as for the reasons as conceded by the Council to which I have referred, this second ground of challenge succeeds.

I therefore come to the third and final ground of challenge.

I have already recited the relevant facts (see paragraphs 70 and following above). Briefly, at 25 August 2010 meeting, Mr Davies told Ms Watwood that he proposed to set a fee of £480 per resident per week, and he proposed to write to third parties (mainly next of kin of residents) seeking a top up of the fee being paid by the Council to that level. He produced proposed drafts of letters, in the terms I have quoted (in paragraph 71 above). He wrote to the Council confirming this proposed course. The Council responded saying it considered such a letter “could constitute a breach of contract”, and by sending its own letters to the next of kind and others responsible for residents asking them to contact the Council if such a request was made. Mr Béar submitted that the Council acted unlawfully, as a matter of public law, in taking those steps, designed to frustrate the claimants’ wish to obtain fees from third parties over and above the fees set by the Council itself.

The ground is based on the premise that:

I do not consider that that premise, or the ground, has been made good.

Leaving aside the issue of whether there is here any decision of the Council amenable to judicial review as a matter of public law – which I consider to be a real issue in this context – the premise fails to take into account the true contractual position between the parties, with which I have already dealt at some length. Briefly, the relevant points are as follows.

As a contractual matter, the claimants would have breached their contracts with the Council had they obtained any third party contributions as a result of the letters they proposed to send to next of kin and others responsible for residents. The terms of that letter were certainly misleading in respect of the powers the claimants indicated they had in relation to seeking contributions. They were not entitled to any contribution from any third party unless they had obtained the Council’s agreement, which they do not suggest they sought or intended to seek. The claimants appeared intent on breaching their contracts with the Council by soliciting contributions from third parties without the Council’s consent. In the circumstances, the Council were entitled to prevent such a breach of contract in the manner of the modest steps that they took.

I refuse the application on this third ground.

However, for the reasons I have given, I grant the application for judicial review on the second ground, namely that the decision of the Council to set a rate at £390 was unlawful. I shall set aside that decision, and direct that Council shall remake the decision lawfully by 31 January 2011, a time by when it agrees it can reconsider the rate in the light of this judgment and make a fresh decision.