An Appeal Court ruling has created a further anomaly in care charging policies, while raising concerns that the cost will force cuts in mental health services.

The court threw out an appeal by four local authorities fighting a High Court decision that four people sectioned under the 1983 Mental Health Act were not required to pay for specialist accommodation after they were discharged from hospital.

Three appeal court judges ruled that the meaning of section 117 of the act was unambiguous and local authorities had no power to charge .

The fact that this might 'result in unfairness' - because people with mental health problems who are not sectioned can still be charged - was no reason to impose an 'artificial' interpretation on its clear wording.

Lord Justice Otton said: 'If there be faults in the system, they can only be remedied by further legislation.'

Age Concern England director general Gordon Lishman said he was delighted by the ruling, but commented that it was 'ironic' that the judgement emerged as the government responded to the Royal Commission on Long Term Care by leaving most people to fund personal care.

Local Government Association head of social affairs and health John Ransford said the appeal court ruling, the government's response to the royal commission and statutory guidance on charging promised in the NHS plan needed 'pulling together and making sense of '.

'If the question of whether you pay for care and how much you pay is determined by how you are diagnosed, then that's a problem and that's something we will be raising with the Department of Health.'

But Cliff Prior, chief executive of the National Schizophrenia Fellowship, argued that section 117 of the Act was 'there for a special reason', because it applied to those compulsorily detained.

Residential accommodation was essential for those taken out of their home situation under compulsory powers who may as a result have lost their accommodation, he said.

The cost of the ruling has sparked alarm among mental health campaigners.

Richard Lissack QC, counsel for the councils involved - the London boroughs of Richmond upon Thames and Harrow, Manchester city council and Redcar and Cleveland borough council - estimated that the 'nationwide annual loss of revenue' to local authorities could be about£100m. Backpayments would mean 'the amount at stake may be as high as£800m', he warned.

Gil Hitchon, chief executive of mental health after care association MACA had 'serious concerns' that local authorities would use the ruling 'as a rationale' for cutting back on services'.

Mr Prior called for 'monitoring' to ensure services were not cut to pay the bill.