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Are damages an adequate remedy for a not for profit company?

Judgment was handed down in Kent Community Health NHS Foundation Trust v NHS Swale Clinical Commissioning Group (CCG) and NHS Dartford, Gravesham and Swanley ([2016] EWHC 1393 (TCC)) (Kent CCGs) on 27 May 2016.

This case relates to a tender for adult community services in North Kent. The claimant, an NHS Foundation Trust and incumbent provider (Trust), was unsuccessful in the tender and issued proceedings alleging breach of the procurement rules. These imposed an automatic suspension on the CCGs’ right to enter into a contract with the successful bidder, Virgin Care.

On the CCGs’ application, Mr Justice Stuart-Smith ruled that the suspension should be lifted. The American Cyanamid test was applied. Serious issue was conceded for the purposes of the application only.

The claimant sought to argue that the case was strong. However, the Court ruled that unless it can form a view, without conducting a mini-trial, that the claimant is virtually bound to succeed, it should not allocate any weight to the merits. It could not form a view on the information available that the claimant was anywhere near this threshold.

As to adequacy of damages, the Court found that damages were calculable based on the intended annual contribution from the contract to the Trust’s fixed overheads.

The Court accepted that the Trust existed to care for the people of Kent, but found that this

“does not give the Trust a monopoly or the right to primacy or priority in the context of NHS procurement. Nor does it determine whether or not damages would be an adequate remedy.”

There was no reason to approach the issue of adequacy of damages differently simply because the claimant was an NHS Trust – the rules created a level playing field between Virgin Care and the Trust.

Faced with opposing evidence from two NHS bodies, the Court felt unable to rule on whether the public would be better served by maintaining the contract with the Trust as part of an integrated wider service or by Virgin as a separate provider. But the Court considered in any event that this matter did not go to the adequacy of damages.

It ruled that damages were an adequate remedy for the Trust and that there was a risk, due to ongoing difficulties faced by the Trust over data reporting and staff vacancies, that damages may not be an adequate remedy for the CCGs.

The Court recognised that a finding of adequacy of damages to the claimant would usually dispose of the matter but went on to consider the balance of convenience. In doing so, the Court accepted that it should consider the likely duration of the suspension but also found that a delay of even 6-8 weeks pending an expedited trial would put mobilisation of the new contract prior to the busy winter period at risk.

While accepting that the public interest, including the good administration of the NHS and what is best for patients, is relevant to the balance of convenience, the Court could not arbitrate on the opposing evidence presented by the parties and found that the public interest did not weigh in either direction.

Finally, the Court acknowledged that if damages were not an adequate remedy and factors of convenience were evenly balanced it may be a “counsel of prudence” to maintain the status quo.  Here, the Court found that, absent the automatic suspension, the status quo would be the CCGs’ decision to enter into a contract with its chosen provider from 1 April 2016 and thus also favoured lifting the suspension. The fact that the CCGs had entered into a temporary extension with the claimant did not change this.

What does this case tell us about the prospects of lifting an automatic suspension in a claim brought by a not for profit company?

There was concern among defendants after the judgment in Bristol Missing Link v Bristol City Council [2015] EWHC 876 that it might be difficult to lift suspensions on claims brought by not for profit companies making a modest or no surplus on a contract. This was based in part on a statement made by Mr Justice Coulson at paragraph 56 of the judgment that:

“In my view, a non-profit making organisation, which has bid for a contract making no allowance for profit at all, and a minimal amount for overheads, is entitled to say that, in such circumstances, damages would not be an adequate remedy.”

In the Kent CCGs case, Mr Justice Stuart Smith rejected (at paragraph 17) an argument that would elevate this statement to a general proposition that the interests of not for profit companies could not be served adequately by a damages award. The Court also rejected the notion that there was a need to show substantial financial loss. The real question is whether the claimant has suffered financial losses which can be readily quantified and fully compensated if successful at trial.

At the same time, the Court in Kent CCGs agreed that the other factors in Bristol Missing Link may well result in damages being an inadequate remedy. In particular, in that case, the catastrophic knock on effects of losing the contract for domestic violence services would, on the evidence, remove a third of the claimant’s revenue and undermine the provision of integrated services in Bristol relating to sexual violence and mental health. In the Kent CCGs case, the evidence did not point to such catastrophic consequences.

Following the approach in Kent CCGs, the correct analysis may therefore now be:

First, if the loss of the contract fatally undermines the viability of the claimant, such that it would no longer be in business by the trial date if the suspension were lifted, damages would not be an adequate remedy. An example of this might be where (as for example in Counted4 Community Interest Company v Sunderland City Council [2015] EWHC 3898) the claimant is the incumbent and has only one contract.

Second, if lifting the suspension would create other catastrophic knock on effects on the claimant’s ability to deliver interdependent services or continue to compete for contracts, damages will not be an adequate remedy.

However, third, the fact that not for profit companies may express the surplus on the direct (‘variable’) cost of servicing a contract in different ways to a for profit company (eg as a surplus or contribution to fixed overheads) or that the surplus may be lower than that which a typical shareholder driven company may demand does not make calculable damages an inadequate remedy.

Equally, fourth, the public service motivation of a not for profit company does not make calculable damages an inadequate remedy.

The Kent CCGs case also illustrates the difficulties in persuading a Court at an application to lift hearing that the interests of patients (eg in NHS cases) or service users (eg in social care cases) point either in one direction or the other given the difficulty in resolving conflicts of evidence without a full trial.

In conclusion, there may be many circumstances in which a not for profit company could successfully argue that damages are not an adequate remedy, particularly where they were established to provide services to the procuring body and may depend for their existence on that contract. However, it will probably not be sufficient to rely on the public service motivation of the company or the absence of a profit line on its financial bid model.

Keating Chambers Simon Taylor

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