BHW Advises GP Partnerships in Successful Claim for Non-Payment

BHW has advised two GP partnerships in their successful claim for non-payment of contractual monies owed by a third GP partnership in proceedings in the County Court at Leicester, and subsequently on appeal in the Birmingham High Court and the Court of Appeal.

Paul Davis (Partner) and Farhaan Pathan (Solicitor), acted for the Partners of Bushloe Surgery and the Partners of Wigston Central Surgery (Claimants), in bringing a claim against Dr Anantt Dayah and Dr Vandana Mannan, partners of the Long Street Surgery (Defendants), for the shared running costs of the medical centre, Two Steeples Medical Centre, from where the surgeries operated as separate medical practices. Imogen Halstead (No5 Chambers) represented the Claimants as counsel at trial in the County Court and on appeal in the High Court.

The case notably dealt with the doctrine of frustration, in particular, the exercise of a statutory power which renders performance of a contract illegal, as considered below.

The surgeries occupied the premises pursuant to a Lease with shared use of common arears, and in connection with the Lease, entered into separate agreements to apportion the outgoings such as utilities, administration and equipment costs between the respective surgeries.

On 21 December 2015, the Defendants were subject to a court order cancelling their registration as a health service provider under section 30 of the Health and Social Care Act 2008, following an application by the Care Quality Commission as a result of concerns about the quality of care that was being provided to patients by their practice. Consequently, the Defendants were unable to practice from the premises with effect from that date, being a criminal offence to practice without registration.

The Defendants appealed against the cancellation of their registration which was eventually set aside by consent in the First-Tier Tribunal in August 2016. In the intervening period, however, the Defendants had continued to receive funding for the purposes of meeting the surgery’s outgoings and staff costs but failed to pay their proportion of the outgoings as allocated within the agreements entered into with the Claimants. The Claimants instructed BHW Solicitors to recover the unpaid sums which ultimately led to court proceedings being issued against the Defendants.

The case was heard in the County Court at Leicester at which the Defendants disputed the claim on grounds that the agreements with the Claimants had been frustrated as they were prevented from practicing and making use of the premises during the period in which their registration with the CQC had been cancelled.

Frustration takes place when something occurs after the formation of the contract, without default of either party, and for which the contract makes no sufficient provision, which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically or fundamentally different obligation from that undertaken at the moment of entry into the contract.

The court further referred to the leading authorities of Davis Contractors v Fareham UDC [1956] AC 696, and National Carriers v Panalpina (Northern) Ltd [1981] 1 AC 675.   More pertinently, the court considered the case of Re Shipton [1915] 3 KB, in which a contract was held to be frustrated when it concerned a delivery of wheat which was requisitioned by the Government under a wartime statutory power before the time for delivery.  This was held to absolve the buyer from the obligation to pay for the wheat.

The court found against the Defendants in applying the law relating to frustration, on the basis that the cancellation of the Defendant’s registration was not a frustrating event as it was a circumstance which had been foreseen and taken into account as part of the agreements entered into. More specifically, the importance of being a registered practice was reflected within the agreements as well as there being an obligation for the parties to use all reasonable endeavours to remain a registered practice. The court also held that the loss of the ability to pay the outgoings, as a result of the registration being cancelled, did not frustrate the obligation to pay those costs. It was also noted that Dr Dayah, who was a signatory to the Lease, had made no effort to remove himself as a party to the Lease when his registration was cancelled thus suggesting that he did not think, at the time, that the cancellation was a frustrating event.

The Defendants also advanced a defence of estoppel, stating that the Claimants stopped sending invoices for their share of the outgoings from December 2015 thereby giving the impression that the Claimants were taking over Defendants’ obligations under the agreements. The court rejected this defence on the basis of the evidence which conclusively showed that the Claimants had written to the Defendants to ask them to pay their share of the outgoings.

Following judgment against the Defendants in the County Court at Leicester on 11 December 2019, the Defendants’ appealed the decision in the High Court. On appeal, the High Court considered the Defendants’ submissions that:

• there was no express provision dealing with cancellation of registration with the CQC within the agreements and that the requirement to use all reasonable endeavours to remain a registered practice was not sufficient, as per the case of National Carriers v Panalpina (Northern) Ltd.

• the obligation to pay for the running costs of the premises was turned into an obligation to make payments for nothing in return.

• the test for frustration was a multi-factorial one and that the judge in the County Court had erred in focusing on the question whether the Defendants had lost their funding as a result of the cancellation of their registration with the CQC, and not that they had lost the right to operate as a GP practice.

In dealing with the Defendant’s submissions, the High Court considered the multi-factorial approach which has regards, amongst other factors, to “…the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.” (Edwinton Commercial Corp v Tsavlirlis Russ (Worldwide Salvage and Towage Ltd) (The Sea Angel), [2007] EWCA Civ 547, at 111).

In applying the multi-factorial approach, the High Court found that it was clear the cancellation of the Defendant’s registration with the CQC did not frustrate the agreements entered into with the Claimants, as the agreements envisaged the possibility that one of the parties might no longer be able to conduct its practice from the premises. The contractual documentation made sufficient provision for the eventuality. The High Court therefore dismissed the appeal in respect of frustration, upholding that the loss of registration may have affected the Defendants’ ability to pay but not their obligation to do so. In other words, whilst it was unlawful for the Defendants to practice during the period in which their registration was cancelled, it was not unlawful for them still to contribute to the outgoings as per the agreements. It was noted that Dr Dayah’s conduct in remaining a party to the Lease, as well as payments being made towards telephone costs after cancellation suggested the Defendants did not consider the agreements frustrated. Furthermore, the High Court had regard to the fact that the Defendants had continued to receive funding specifically for the purposes of the outgoings during the period of cancellation but had not been used accordingly.

The High Court also dismissed the Defendants’ appeal in respect of its estoppel defence as it could not be reconciled with the factual evidence submitted before the court.

The Defendants subsequently applied to the Court of Appeal for permission to appeal the decision of the High Court. In considering the application, the Court of Appeal determined:

• The judgment identifies the test for frustration at [68], namely that “…frustration occurs whenever a law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract…”

• In approaching the issue of frustration, the judge undertook a multifactorial approach. At [74] to [79] the judge identified the reasons for finding that the cancellation of the appellant’s registration did not frustrate the FMA and the MIA. The findings are fair and reasonable. At [80] he concluded that “…the terms of the Agreements show that an event which led to a practice being unable to continue to operate at the Medical Centre was not a completely unexpected and unanticipated event which rendered performance of the Agreements radically different from what had been anticipated.”

• As the judge found, “The contractual documentation made sufficient provision for this eventuality.” It meant that the appellant’s loss of registration did not render the obligation to pay for the running costs of the medical centre something “radically” different from what was contemplated by the parties. In so finding Cavanagh J made no error of law. This appeal has no prospect of success.

• There is no important point of general application regarding the effect of cancellation under the Health and Social Care Act 2008 on sharing costs of GP practices. The application of the doctrine of frustration is fact sensitive and will turn upon what was in the contemplation of the parties to the particular contract. This was a fact sensitive case, there is no important point of general application.

For the reasons above, the Defendants application was refused.

Whilst the case deals with an interesting point on the law of frustration in the context of the exercise of statutory powers, it also highlights the importance of properly and carefully drafted agreements to ensure that they accurately reflect the parties’ purpose and intentions.