The Background Monitor is the Independent Regulator of NHS Foundation Trusts (FTs). Unison is a public sector trade union representing a large number of National Health Service employees.

FTs were established with greater freedom to act, independently of government control, than their predecessor bodies (NHS Trusts). But Parliament wanted to limit this freedom so that the principal role of FTs remained that of providers of health services within the NHS.

Under section 44 of the National Health Service Act 2006 (the Act), Monitor must therefore ensure that the authorisation of an FT limits the revenue that may be 'derived [by it] from private charges' in each financial year. This limit (the cap) is set as a percentage of turnover. The level of the cap is intended to ensure that the FT is now deriving no greater a proportion of its income from private charges than it was in the year to 31 March 2003.

Between 2003 and 2008, Monitor adopted a restrictive definition of what it meant for income to be 'derived' from private charges. In simple terms, income was counted for the purposes of the cap only if it was directly derived from charges received by the FT from private patients. Indirect income - for instance, income from a FT's participation in a joint venture providing services to private patients - was not treated as counting towards the cap. This had the effect of expanding the range of services that FTs could provide outside the NHS.

Unison argued that this permitted FTs to carry out too much work related to private patients, which threatened their focus on core NHS activities - the very thing that Parliament intended to prevent. In 2008, under the threat of judicial review, Monitor consulted on its application of the cap. It considered three broad options -

Option 1 - Retaining the status quo; continuing to apply a restrictive definition of when income is 'derived' from private charges.

Option 2 - Adopting a more liberal definition of 'derived' income, and counting certain revenue that comes only indirectly from charges made to private patients (for instance, revenues from joint ventures).

Option 3 - Adopting a much wider definition of 'derived' income, which would include revenue from third parties to whom the FT provided services (e.g. by leasing land) where those third parties derived their own source of revenue from work carried out for private patients.

The majority of respondents (most of them FTs) favoured the retention of option 1. Some (including two FTs and some professional auditors) thought that option 2, or a variant of it, was appropriate. Unison insisted that option 3 was the only one that was consistent with the requirements of the Act.

Following the consultation, Monitor chose to adopt option 2 - in effect, as a compromise between the claims of Unison and the preference of the FTs for greater commercial freedom.

Unison pursued a judicial review of this decision.

The judgment

At the hearing, Monitor argued that to interpret the Act as requiring it to adopt an approach similar to option 3 was to take an oppressive and disproportionate approach to the matter that Parliament had sought to address in section 44 of the Act. It would involve FTs, and Monitor, in a complicated 'tracing' exercise to locate the original source of any revenue.

By contrast, Monitor had adopted a balanced and sensible interpretation. It had latitude to do so. The line of case law following R v Monopolies and Mergers Commission ex p South Yorkshire Transport Ltd was relevant. As in those authorities, this was a case in which the language of the Act - in this case the meaning of the word 'derived' - was sufficiently open ended that a regulator had some margin of discretion as to how it should be interpreted. It was important only that the discretion was exercised properly in public law, as it had been.

This argument was comprehensively rejected by Cranston J in the Administrative Court. The key elements of his judgment were these:

  1. The question of interpretation of the Act is one of law, for the court to determine.
  2. The South Yorkshire line of case law does not assist Monitor. In those cases, the courts determined the meaning of the relevant statutes as a matter of law. Where the statutory language, when properly interpreted, required a value judgment to be made in applying the law to individual circumstances, there was clearly room for discretion by the public authority. But that is not the same as saying that there is room for judgment as to the proper interpretation of the law.
  3. The concept of income that is 'derived' from a certain source is well-known in law - in particular (though not exclusively) in the context of tax law. It involves reaching past the immediate source of revenue and finding the source from which, 'in reality', it comes. This is the correct interpretation in law of section 44 of the Act. There is no discretion as to the meaning of the language. There is no basis for artificially limiting the process of looking for the real source of the revenue in the way that Monitor's option 2 does.
  4. In reaching its decision to adopt option 2, Monitor considered the appropriateness of the different options and the potential consequences flowing from them. But there was little evidence that it treated the question before it as a matter of legal interpretation. "Whether option 2 fitted with the statutory concept does not seem to have entered the board's deliberations, or if it did, it was certainly not at the forefront."

The court granted a declaration that Monitor's adoption of option 2 was unlawful. The declaration does not unwind the consequences of the previous reliance on option 1. Nor does it impose option 3. Monitor must reconsider the issue and decide, in the light of the court's interpretation of section 44, how it wishes to proceed.

Commentary

Whatever the merit of the political judgment underpinning section 44 of the Act, there is little doubt that the section has unsatisfactory consequences.

By capping FTs' income from private charges at the level that was earned in the year to 31 March 2003, it creates an arbitrary range of outcomes. Some FTs are permitted to derive more than 30% of their revenue from private charges; for others, the allowance is zero. This discriminatory effect becomes harder to justify as time passes.

Moreover, the outcome for many FTs is that they would have much greater scope for income generating activities if they had not converted from NHS Trusts. That is a paradoxical result, given the general thrust of government policy on the greater independence of FTs.

Nonetheless, the judgment in Unison v Monitor makes it clear that this is the effect of the law, and that it is binding on Monitor. It cannot be mitigated by 'interpreting' the Act in a more nuanced way. If the law is to change, it must be by legislative means - a point that may well be considered in due course by the post-election Parliament.

For public authorities generally, the case emphasises some salient points:

  • Decisions are only lawful if they are based on a correct interpretation of the law.
  • Interpretation is ultimately a matter for the courts. While it is not typically the role of a court in a judicial review case to substitute its opinion for that of the decision-maker, this does not apply to questions of law.
  • Although there is good authority for the principle that certain statutory provisions, correctly interpreted, allow room for value judgment by a regulator in applying the law to individual cases, the consequences of this must not overstated. It is not equivalent to a margin of discretion to interpret the statute. By definition, the law has the meaning that a court gives to it.

A curious aspect of Monitor's approach to section 44 of the Act was therefore that it went out to public consultation on what was essentially a question of law. The judgment of Cranston J implies strongly that this was not the right approach and led to Monitor making its decision on irrelevant grounds.

Read the full judgement in R (Unison) v Monitor on the British and Irish Legal Information Institute website.