Derby Teaching Hospitals v Derby CC & Charity Commission (2019)


12 December 2019 wasn’t merely a momentous day for the nation politically, it also saw the High Court hand down judgment on one of the year’s most interesting charity cases.

In Derby Teaching Hospitals NHS Foundation Trust & others v Derby City Council & others [2019] EWHC 3436 (Ch), a group of NHS Foundation Trusts (“FTs”) brought proceedings against the various local authorities in whose areas the FTs had premises. The claim sought a declaration that the FTs were charities and were therefore entitled to mandatory rating relief. It also sought repayment of 80% of the rates paid by FTs over the previous 6 years. Claims by NHS Trusts (other NHS bodies who had not taken up FT status) had also been intimated. The total cost to the local authorities of having to repay 80% of the rates collected over the previous 6 years to all such NHS bodies had been estimated at £1.5 billion.

The Court directed that the question whether the FTs were charitable should be decided as a preliminary issue and the parties agreed that 6 sub-issues arose:

Was the meaning of “charity” in the rating legislation (the Local Government Finance Act 1988) the same as the meaning of “charity” in the Charities Act 2011?

If so, were the FTs “subject to the control of the High Court in the exercise of its jurisdiction with respect to charities”?

What were the purposes of the FTs?

Were those purposes exclusively charitable?

Did the fact that the assets of FTs could be applied to non-charitable purposes on dissolution render the FTs non-charitable?

Were the purposes of the FTs for the public benefit?

In the summer of 2019, the Charity Commission applied to intervene in the proceedings and was granted permission to do so.

The legal argument ranged over five days in Court. Handing down judgment on 12 December 2019, Mr Justice Morgan ruled that the FTs were not charities since their purposes were not exclusively charitable. He therefore dismissed the claim.

The Judge came to his decision squarely on the basis of the proper interpretation of the legislation by which FTs were now governed, the National Health Service Act 2006. Although the Act designated each FT as a “public benefit corporation” (an expression used only in the NHS Act 2006) with its own constitution, the Judge concluded that the width of some of the purposes set out in the statute went beyond what was exclusively charitable.

The “principal purpose” (as the statute defined it) of each FT was “the provision of goods and services for the purposes of the health service in England.” The Judge held that this was “plainly charitable.” This aspect of the decision might raise interesting possibilities for other service-providers who constitutionally limit their services to the health service on a not-for-profit basis.

However, other provisions not only permitted FTs to raise money better to pursue that principal purpose but constituted independent purposes in their own right. Notably, the Act allows an FT to provide goods and services for “any purposes related to the provision of services provided to individuals for or in connection with the prevention, diagnosis or treatment of illness.” The Judge held that this went beyond the purpose of the advancement of health.

The Judge also followed a long line of authority to the effect that a provision which authorises a body to do that which subjectively seems to it to be conducive or ancillary to another object is in fact a free-standing object. The cases begin with Keren Kayemeth Le Jisroel ltd v IRC [1931] 2 KB 465 where the association could pursue objects or exercise powers as should “in the opinion of the Association be conducive to the attainment of the said primary object”. It was held that the objects of the association were not objectively defined in a way which confined them to charitable objects (even if the primary object was charitable) because the association could form its own subjective opinion as to what its objects could be. In the case of an FT, statute allows it to do “anything which appears to it to be necessary or expedient for the purpose of or in connection with its functions necessary or expedient.” The same principle applied: that was not objectively limited to things necessary or expedient to the achievement of its other purposes (even if charitable).

Having decided the case on that basis, it was unnecessary for the Judge to decide the other issues. However, he expressed the view that, even if (about which he had doubts) the meaning of “charity” in the rating legislation was the same as the test in the Charities Acts (thereby importing the requirement that the FTs should be “subject to the control of the High Court”), there was no substantial ouster of that jurisdiction (applying the much-criticised Court of Appeal decision in Construction Industry Training Board v Attorney-General [1973] Ch 173).

Although it was a point of contention between the parties, in view of his decision on the questions of construction, the Judge did not it necessary to decide whether there was a rule of law which rendered non-charitable that which was the province of government. It was observed in argument that the Commission’s guidance ‘RR7 - The Independence of Charities from the State” referred to next to no case law in support of its contentions.

The public benefit issue was not pressed at the hearing but the Judge was taken to a large number of authorities on the question of whether a corporation which had no “asset lock” on dissolution could be charitable. Noting that “neither side was able to reconcile all of the decisions with the submissions it put forward”, the Judge declined to decide the issue since it was unnecessary in light of his other findings.

The Judge refused permission to appeal but extended time into 2020 for the FTs to renew their application to the Court of Appeal. If the matter goes further, it seems likely that two question of principle will loom large: (1) whether there is a distinction between the province of government and of charity and, if so, how the line should be drawn and (2) whether charitable status depends on an asset lock on dissolution.