Moreton, R (on the application of) v Medical Defence Union Ltd. [2006] EWHC 1948 (Admin)

Case No CO/3152/2005[2006] EWHC 1948 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 26 th July 2006
Before
MR JUSTICE NEWMAN
Between
The Queen on the application of MORETONClaimantMEDICAL DEFENCE UNION LTDDefendant
(Transcript of the Handed Down Judgment ofSmith Bernal WordWave Limited190 Fleet Street, London EC4A 2AGTel No: 020 7421 4040 Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Mr A ULLSTEIN QC and Ms S HENNESSY (instructed by Irwin Mitchell incorporating Alexander Harris) for ClaimantMr R SNOWDEN QC, Mr M FORDHAM and Mr B KENNELLY (instructed by Fladgate Fielder) for Defendant
Judgment
[1]I have before me a preliminary issue as to whether the defendant, the Medical Defence Union Limited (hereafter the MDUL), is amenable to judicial review, either because it is a “public body” or because it is exercising a “public function” in a respect which affects the claimant (CPR 54.1(2)(a)(ii)). Bean J. ordered the issue to be tried and the grant of permission was: “limited to whether the impugned decision is amenable to judicial review. The grant or otherwise of permission on the other issues is to await the court’s decision on the preliminary issue”.[2]The claimant is one of a number of individuals bringing private law proceedings against Melvyn Megitt, an orthodontist, arising out of allegedly negligent treatment carried out by him. The directors of the MDUL decided not to provide Mr Megitt with indemnity against the claimant’s claim, which indemnity was one of the possible discretionary benefits of his membership of the MDUL.[3]A substantial number of individuals have brought similar claims against Mr Megitt. The MDUL has agreed to provide indemnity against three claims, but in all other cases it has declined to provide assistance. It gave no reasons for its decision. It is not in doubt that if the decision stands, some seventy-four claims brought against Mr Megitt will have to come to an end, since he has not the financial resources necessary to satisfy any judgments which might be obtained.[4]It will be apparent from these uncontested facts that the MDUL’s decision will give rise to significant hardship to many individuals. It can be said that, whatever the correct legal outcome of this preliminary issue, the character of discretionary indemnity gives rise to concern on a broad front. It highlights the existence of a disparity between discretionary indemnity and the terms provided to practitioners by insurance companies. In the view of the MDUL, discretionary indemnity is not as satisfactory as that which is available under an insurance contract. The MDUL therefore also provides an insurance contract as a benefit of membership. As I shall have cause to recite later in this judgment, it is to be noted that this view is not shared by another significant provider of discretionary cover, namely Dental Protection Ltd (DPL), and its associated company, the Medical Protection Society Ltd (MPS). In a news release on 9th November 2005 the Chief Executive of the MDUL stressed that only a regulated insurance policy provides adequate safeguards for doctors and patients in connection with negligence claims. He stated:
“The MDU wholeheartedly supports the Department of Health’s policy to require mandatory clinical negligence indemnity for all healthcare professionals, but we believe very strongly it should be either through employers’ indemnity or an insurance contract. The UK is very much out of step in that discretionary indemnity still exists. We remain surprised that the Department continues to countenance discretionary indemnity, with all its uncertainties, in the light of the Australian Government’s recent decision that all Australian doctors and dentists must be insured. Discretionary indemnity is no longer acceptable there.”
[5]These proceedings for judicial review constitute an attempt to redress an adverse consequence of discretionary cover affecting the claimant, by the application of public law review to the exercise of discretion. In short, the claimant’s case is that, notwithstanding the MDUL’s legal character and status as a company limited by guarantee, providing discretionary membership benefits, on a mutual basis, under a statutory contract between itself and its members, pursuant to its Memorandum and Articles, it is nevertheless subject to public law scrutiny and review in connection with the exercise of its discretion whether to indemnify one of its members. The argument has not been extended to any other of the numerous discretionary powers held by the MDUL. Mr Ullstein QC has manfully sought to overcome the legal hurdles to the claimant’s case, but, in my judgment, the law is clear and the attempt fails.

The nature of the MDUL

[6]The MDUL is a private company limited by guarantee. Its members are doctors, dentists and other healthcare professionals who, in return for an annual membership fee, are afforded the right to request certain discretionary membership benefits, including legal advice and assistance and the provision of indemnity in respect of claims made against them. (See, in particular, Article 48(3) of the Memorandum and Articles of Association). It operates on a mutual basis providing any such discretionary benefits from funds contributed by its members. It is not an insurance company. (See Medical Defence Union Ltd v Department of Trade [1980] Ch 82).[7]Section 14 of the Companies Act 1985 provides that its Memorandum and Articles of Association should constitute a statutory contract between the MDUL and its members, and govern the scope and manner in which its directors exercise their powers. The management of the affairs of the MDUL, in the exercise of all powers on behalf of the MDUL, is in the hands of its board of management or any committee or agent authorised by it. The members of the board of management are, for all purposes, the directors of the company. Article 48 provides for a discretion to:
“… grant from the funds of The MDU to any member or any applicant for election to membership …. an indemnity wholly or in part with regard to any action, proceeding, claims or demands by or against them in respect of any matter concerning or affecting whether directly or indirectly the professional character or interests or conduct in a professional capacity of any such member …”
. Article 48(3) provides:
“Any such indemnity may be granted or terminated by resolution of the Board of Management or any authorised committee or decision of any authorised agent and the grant of indemnity in every case shall be made only upon such terms and conditions as the Board of Management committee or agent shall think proper and it shall rest only in the absolute discretion of the Board of Management committee or agent in every case to limit or restrict the grant of such indemnity or altogether to decline to grant the same or to determine any indemnity so granted without assigning any reason.”
[8]A member is not entitled to insist on the exercise of a discretionary power in his or her favour. In the Medical Defence Union Ltd v Department of Trade, Sir Robert Megarry VC characterised the right of the member as comprising “Merely a right to have his request fairly considered by the council or one of its committees”. The case required the court to determine the question whether the contract between each member and the MDUL was a contract of insurance for the purposes of the Insurance Companies Act 1974. The Vice Chancellor held that, although the right to which the contract gave rise was a “benefit”, it was not itself of the nature of money or money’s worth. Further, it did not satisfy the requirements for a contract of insurance and, since subscriptions were unaffected by claims and the general nature of the Union’s work was far removed from that carried on by those concerns generally accepted as undertaking contracts of insurance, he granted a declaration that it was not an insurance company which carried on any class of insurance business for the purposes of the 1974 Act.[9]The claimant has not sought to challenge the correctness of this decision. Nor has the claimant suggested that insurance companies who do provide indemnity to doctors, dentists and other healthcare professionals in connection with the discharge of their professional responsibilities are subject to judicial review. This realistic recognition of the position nevertheless points up a central difficulty for the argument that the MDUL is subject to judicial review because it has been based upon the proposition that the MDUL is so woven into the fabric of public regulation or into a system of government or governmental control as to make it subject to judicial review.

The claimant’s argument

[10]The terms of the argument reflect the observation of Sir Thomas Bingham MR, as he then was, in the case of R v The Jockey Club, ex parte Aga Khan [1993] 1 WLR 909 at 921. Having reviewed certain parts of the judgment of the Court of Appeal in R v The Panel on Take-overs and Mergers, ex parte Datafin Plc [1987] QB 815, Sir Thomas Bingham observed as follows: “The effect of this decision was to extend judicial review to a body whose birth and constitution owed nothing to any exercise of governmental power but which had been woven into the fabric of public regulation in the field of take-overs and mergers. R v Advertising Standards Authority Ltd ex parte Insurance Service Plc (1989) 2 Admin.L.R.77 appears to me to be a precise application of the principle thus established to analogous facts”.[11]Three principal conclusions were formulated to comprise the steps in the argument of Mr Ullstein. In turn, he submitted they led to the conclusion that the MDUL has been woven into the fabric of public regulation in connection with doctors, dentists and healthcare professionals. In particular,(i) The government provides dental services pursuant to a statutory duty.(ii) The government regulates dentists by itself and through the General Dental Council.(iii) Both historically and presently, the MDUL is woven into the system of the provision of dental services and of the regulation of dentists by the services, particularly the provision of indemnity, to dentists.[12]He identified a number of factors in the development of his argument.[13]His statutory starting point was section 1 of the National Health Service Act 1977, which provides that it is the duty of the Secretary of State to: “continue the promotion in England and Wales of a comprehensive health service designed to secure improvement -(a) in the physical and mental health of the people of those countries, and(b) in the prevention, diagnosis and treatment of illness, and for that purpose to provide or secure the effective provision of services in accordance with this Act”. …. Section 3 of the Act provides that it is the Secretary of State’s duty to provide throughout England and Wales various services, including dental services. It is clear that there is a statutory duty on the Secretary of State to provide or secure the effective provision of dental services, but I can see nothing in section 1 and section 3 which supports the conclusion that the effective provision of those services will not be provided in accordance with the Act, if the practitioners who provide the service do not have protection by way of indemnity in respect of claims in connection with negligent treatment. In my judgment, “dental services”, within the meaning of the Act, cannot be said to be ineffective if redress in respect of negligent treatment is unavailable. Nor am I moved from this conclusion by the fact that indemnity is provided under a National Health Service indemnity scheme where Health Authorities become vicariously liable for an employee’s negligence. The availability of indemnification from a National Health Service Authority arises out of a need for a scheme to meet the vicarious liability of a Health Authority as the employer of a negligent practitioner. It is not the product of any statutory duty imposed on a National Health Service Authority. It is not providing indemnity pursuant to a general policy of government that practitioners must be insured. Thus the suggestion that self-employed practitioners who are insured are to be regarded as “providing privatised” government services is plainly wrong.[14]The second conclusion or step relied upon by the claimant has its origins in the functions performed by the General Dental Council (GDC). The GDC does have the responsibility of regulating dentists. In November 1989 the GDC issued a document entitled “Professional Conduct and Fitness to Practise” which was distributed to dentists. Paragraph 8. read: “The Council attaches great importance to membership of a defence society for every dentist involved in the treatment of patients, both in the interests of patients, for whom compensation may be provided in appropriate circumstances, and in the interests of dentists who then have access to assistance and representation in connection with professional, legal and disciplinary matters. Dentists who require advice in connection with such matters would be well advised to contact their defence society or professional association without delay”.[15]In the May 1993 edition there was a small change, which was to this effect:
“The Council attaches great importance to dentists involved in the treatment of patients being adequately insured and indemnified…”
[16]In a document entitled “Maintaining Standards November 1997”, the Council stated in paragraph 1.2: “Obtaining indemnity. A dentist involved in advising or treating patients must either hold appropriate membership of a defence organisation or otherwise be indemnified against claims for professional negligence. This is in the interests both of patients, who may have a right to compensation and of dentists, who may require professional and legal advice. A lack of appropriate defence organisation membership or adequate indemnity cover which includes professional and legal advice, would almost certainly lead to a charge of serious professional misconduct”.[17]Contrary to the submission on behalf of the claimant, the purpose and content of this regulatory material does not assist the claimant. It is clear that membership of a defence organisation, including the MDUL or appropriate indemnity from an insurance company, is regarded as an essential professional requirement for a practising dentist, but the very fact that the regulatory concerns of the GDC can be met by membership of the MDUL provides approbation for the sufficiency of discretionary indemnification. It amounts to a declaration that membership of the MDUL will provide effective cover, despite the obvious differences between it, as a form of cover, and that which is provided by an insurance company.[18]Next I should mention, since Mr Ullstein placed considerable weight upon it in support of his third conclusion or step, a short passage from a textbook, Medical Law, 3rd Edition by Andrew Grubb at page 527, where the editor, under the heading “Who pays the bill?”, observes:
“Obviously, it was a matter of concern to the doctor. A doctor practising in an NHS hospital was contractually obliged to belong to a defence organisation – Medical Defence Union, Medical Protection Society, Medical and Dental Defence Union of Scotland. A general practitioner would customarily also become a member but was not obliged to do so. The functions of such organisations included the provision of legal advice and representation when claims were made against the doctor, and the indemnification of the doctor against any award of damages. During the 1980s as medical litigation increased so also did the costs of membership of defence organisations … Furthermore, one organisation introduced differential rates which reflected the risks of practising in different specialities .... pressure mounted to replace the system…. Health Authorities were equally concerned since they faced an increasing financial burden in meeting the cost of their employees’ membership. Additionally, since the Health Authority might itself be liable to contribute to the damages because of its own wrongdoing, it faced a growing charge on its funds as damage claims became more onerous during the 1980s. This was at a time when funds were barely keeping pace with demands placed upon the service. The basis for arranging the payment of damages was a circular agreed between government and the defence organisations in 1954 (HM(54)32). It sought to distribute the financial burden of litigation between Health Authority and defence organisations, save in so far as one was entirely to blame. The circular contemplated that the Health Authorities and defence organisation should agree the proportion of responsibility which they were prepared to accept without recourse to contribution proceedings. In the absence of such agreement, each would bear 50% of the burden of litigation.”
[19]Mr Ullstein suggested that these events, in particular, the issue of the circular, evidenced a de facto partnership between the government and the defence organisations, entered into for the purpose of securing that effective provisions for the indemnification of patients in respect of damages claims were available. The material simply cannot support the proposition he has advanced. It does not provide evidence of the existence of any form of partnership. It records a change in policy, taken by Health Authorities when they were concerned about the increasingly high level of subscriptions which they were obliged to pay for their employees, and their concern about the increasing level of need as employers to meet claims in respect of medical practitioners. They ceased to be responsible for subscriptions on behalf of practitioners and reached a general agreement about sharing payment of damages in joint liability cases. The limited significance of these events does not point towards the defendant becoming interwoven into the government provision of dental services and the government system of regulation of dentists. The contrary seems to me to be the case. I cannot see how it can be maintained that the MDUL is woven into the fabric, whereas insurance companies providing indemnity to practitioners are not. It is true that a regulatory system exists for insurance companies in connection with the provision of financial services, but it does not touch the matters under consideration.[20]Mr Ullstein submitted that if the court rejected his argument it would leave the MDUL as above the law. That is plainly not correct. It is governed by the provisions of the Companies Acts affecting a company limited by guarantee and by appropriate provisions of the general law.

Privatisation of the Business of Government

[21]Where parliament has permitted local authorities to provide services, either by themselves or by contracting with third parties, or where, for example, a privatised company is running a prison, circumstances can arise in which the function being performed is, in character, a governmental function. As a result, the private body can, in the exercise of such functions, be subject to judicial review. See R (Heather) v Leonard Cheshire Foundation and HM Attorney General [2002] EWCA Civ 366 [2002] 2 All ER 936.[22]An example arising in the context of National Health services, where parliament had made provision for the Secretary of State to make arrangements whereby private bodies could provide National Health services, can be seen in the case of R (A) v Partnerships in Care Ltd [2002] EWHC 529 (Admin). It instances the existence of a governmental function which retains its character as such when the function is performed by a private person. The difficulty in the way of the claimant is that no relevant governmental function can be identified.[23]Mr Ullstein also sought to sustain the argument by reference to the observations in the cases of R v Advertising Standards Authority Ltd ex parte Insurance Service Plc and Datafin. The concept, pithily expressed, was as follows, namely that the body in question “is clearly exercising a public law function which, if the authority did not exist, would no doubt be exercised by the Director General of Fair Trading”, see Standards Authority case. A similar view was taken of the function of the Take-over Panel. It was submitted the function performed by the MDUL would, if it did not exist, have to be provided by government or by an insurance company. It is not out of disrespect for the care with which Mr Ullstein prepared his submissions and the range of authority which he advanced to the court that I have concluded that it is not necessary to revisit the cases. His argument fails because, however it is put, there is no sufficient connection between the government and the MDUL, whether by way of weaving delegation or privatisation, nor by reason of the function under consideration being one which the government would have to perform if the MDUL was not performing it. Insurance companies perform the function, providing indemnity to medical practitioners, outside any form of government control. The relevant function is the provision of insurance cover. At its highest it can be said that the GDC has required insurance cover (of some nature) as a professional standard. Had parliament required it, I have little doubt, having regard to the cases, that that would not have led to the conclusion that an insurance company which met the requirement would be exercising a public function. But that has not been argued.[24]A considerable body of argument was addressed to the capability of public law grounds for review being applied to the constitution of the MDUL. I do not regard it as necessary to rehearse the detail of the argument. In an attempt to avoid the obvious tension which exists between the exercise of a discretion to refuse indemnification, in the mutual interests of the members of the MDUL and the contention in public law, for which Mr Ullstein argued, namely the need for regard to be paid to the public interest of indemnifying those who have suffered at the hands of negligent practitioners, he turned to the possible intervention of equity and to a suggestion that the rules of natural justice could be applied to a body such as the defendant. For example, he relied upon Gaiman and Others v National Association for Mental Health [1971] Ch 317. In my judgment, none of this is to any avail. The remedies of the members are derived from the constitution of the MDUL and the provisions of the Companies Acts. If a sufficient proportion of the members became dissatisfied with the Articles or their manner of implementation by the directors, they could act internally by altering the Articles or by a special resolution under section 9 of the Companies Act 1985, or by removing and replacing the directors by ordinary resolution (see section 303 of the Companies Act 1985). The directors must act in accordance with their fiduciary duties to the company. They are bound to exercise their powers for the purposes for which they were conferred and not for any collateral purpose. That does not lead, as Mr Ullstein suggested, to a position in which the MDUL could pay no claims at all in order to conserve its funds. Its objects require it, as a principal objective, to provide discretionary assistance and indemnity to its members. A decision to make no payments of any claims whatsoever, where funds were available, would not further the objects of the company. Nor would it be in the commercial best interests of the MDUL, which would self-evidently lose its subscribing members and the revenues that they bring to its mutual fund. I can see no reconciliation between the requirements of public law duties and the scope of the duties of directors in relation to members under the constitution of the MDUL.

The Statement of Mr John Tiernan

[25]The claimant relied upon a statement by Mr John Tiernan of Dental Protection Limited (DPL) and the Assistant Dental Director of DPL. DPL is the Dental Division of the Medical Protection Society Limited (MPS), a private company limited by guarantee. Like the MDUL, DPL and MPS are not insurance companies. They have been supporting their members by way of indemnification on a discretionary basis since 1892. It is apparent from an exhibit to Mr Tiernan’s statement that in 2004 a Department of Health consultation paper headed “Strengthening the General Dental Council” invited representations from bodies such as the MPS and the DPL. Question 11 of the consultation paper was to the following effect:
“Should we require by law that dentists have indemnity insurance before registration?”
Thereafter, in a number of pages in its response to the consultation, the MPS carried out a comparison of different professional indemnity models and advanced arguments, in support of its opinion, that discretionary indemnification provided advantages, because of its flexibility, over commercial insurance policies. It dismissed the suggestion that the existence of discretion created uncertainty “as a self-evident commercial reason put forward by insurance companies in order to undermine confidence in discretionary indemnity”. As to that, it was said:
“Such an argument, while compelling at first sight, fails to acknowledge the fact that an insurer can and will refuse cover if the circumstance does not fall within the terms of the policy, or if the policyholder fails to comply with the conditions of the policy. Any discretionary organisation that refused legitimate claims from its members would not remain in business for long. In 112 years of continuously indemnifying UK dentists, MPS/DPL has never used its discretion to leave a patient uncompensated.”
The purport of Mr Tiernan’s statement was, in short, to that effect. He also expresses the view that since the government is satisfied that proper indemnity cover can be provided through membership of a defence society, it must follow that the government’s confidence in the defence society furthers a case for the discretion being exercised so as never to refuse indemnification.[26]I refer to this piece of evidence because it highlights the existence of a significant difference of opinion between the defence unions. It is not entirely clear what purpose this evidence otherwise serves. At best, it would seem it was thought capable of providing a basis for public law principles of irrationality, unfairness or public interest principles to come into play. Suffice it say that I am entirely satisfied that the position in law of the MDUL remains unchanged from that clarified by Sir Robert Megarry VC. In the broadest sense of the words, I accept that there is a “public interest” in persons who have received negligent treatment being indemnified for their claims but, that said, we are a long way from there being any guarantee that all practitioners who are negligent will, by way of indemnification, be in a position to pay. Even under the paradigm example of protection which Mr Ullstein urges should be available, grounds for repudiation can exist. There is no form of safety net for those who are negligently treated by practitioners who have no insurance at all. There is no over-arching principle of public interest which requires this court to conclude that the hardship to which the claimant and other claimants in the like position are faced in the litigation against Mr Megitt, can justify this court concluding that the MDUL is amenable to judicial review. I, therefore, decide the preliminary issue in favour of the defendant.27. MR JUSTICE NEWMAN: For the reasons given in a judgment, which is now handed down, the preliminary issue which was ordered in this case is decided in favour of the defendant.28. Yes, Mr Kennelly. You are here on your own.29. MR KENNELLY: I am. Mr Austin and I have agreed an order.30. MR JUSTICE NEWMAN: Oh, you have.31. MR KENNELLY: So I seek to pass that up.32. MR JUSTICE NEWMAN: Thank you very much. (Handed). Just give me a moment to look at this. (Pause.) That seems perfectly in order so I initial that. Thank you.

Cited in 1 later judgment