Mutual disappointment: the Court of Appeal rules on use of the well-being power

Court of Appeal's decision on LAML

The Court of Appeal has reined in local authorities’ ability to enter into innovative arrangements and find new ways of working to meet the Government’s efficiency targets. In its long awaited judgment in the LAML case, Brent LBC v Risk Management Partners Ltd; London Authorities Mutual Ltd & Harrow LBC (Interested Parties) [2009] EWCA Civ 490, the court has stated that the well-being power does not give authorities carte blanche to do anything that simply brings costs savings. 

The decision provides a useful discussion on the scope of the well-being power and the use of the power under s.111 of the Local Government Act 1972 for complex vehicles. Authorities considering setting up joint ventures to deliver services will now need to be cautious and consider carefully what are the most appropriate powers, rather than rely on the general power under s.2 of the Local Government Act 2000. 

Administrative Court proceedings

The LAML appeal arose from two related cases that were heard in April and May last year: R (Risk Management Partners Ltd) v Brent LBC; London Authorities Mutual Ltd and Harrow LBC (Interested Parties) [2008] EWHC 692 (Admin) (“LAML 1”) and Risk Management Partners Ltd v Brent LBC [2008] EWHC 1094 (Admin) (“LAML 2”) .

Both cases related to Brent’s decision to participate in establishing a new mutual insurance company, London Authorities Mutual Ltd (LAML) that would be controlled by, and run for the benefit of, participating London authorities. It was intended that LAML would benefit its members through costs savings and improved risk management. Brent issued an invitation to tender for the insurance contract but abandoned it prior to the award; instead it directly awarded the contract to LAML, which had not participated in the procurement exercise.  Risk Management Partners (RMP) was a rival insurer who had tendered for the insurance contract.

LAML 1 was an application by RMP to quash the decision on the basis that it was ultra vires, while in LAML 2 RMP claimed damages, contending that Brent's award of the insurance contract to LAML breached the Public Contracts Regulations 2006.

Ultra vires claim

In LAML 1, Brent contended that it had power under either s.111 of the Local Government Act 1972, which empowers a local authority to do any thing "which is calculated to facilitate, or is conducive or incidental to, the discharge of any of" its functions, or s.2 of the Local Government Act 2000 (the well-being power). Lord Justice Stanley Burnton granted RMP's application for judicial review, stating that s.111 did not give Brent power to establish or to become a member of a mutual insurance company as such action was at best incidental to the authority’s incidental power to insure and was not incidental to the discharge of any of the authority’s functions. Nor could Brent provide financial assistance to a company for it to do what the authority itself could not lawfully do, i.e. provide insurance.  

The High Court also held that Brent did not have power under the well-being power, as the financial well-being of a local authority was not the same as the economic, social or environmental well-being of its area.

Procurement claim

In LAML 2, Brent contended that it did not have to comply with the Public Contracts Regulations as the contract was awarded to a company which fell within the exemption in Teckal srl v Comune de Viano (C107/98) and so the arrangement could be regarded as an “in-house award”. It also claimed that RMP was barred from claiming damages as it had not brought its claim within the three month time limit in reg.47(7). However the court (Stanley Burnton LJ again) allowed RMP's claim, finding that the first condition of the in-house award exemption which relates to control was not satisfied. 

Court of Appeal’s decision

Brent’s appeal against both decisions concerned two issues:

• whether it had power to enter into contracts of insurance with LAML and whether those powers were exercised (the vires issue); and
• whether it should have followed the competitive procedure specified in the 2006 Regulations before entering into contracts with LAML (the procurement issue).

The Court of Appeal dismissed both appeals.

Vires issue

Brent’s argument for a broad interpretation of “well-being” in s.2 was based on the Government’s statutory guidance; however, the court emphasised that guidance was only guidance, not persuasive authority, and it was for the courts to determine the meaning of “well-being”. While Parliament in introducing the new power may have been making a step change by giving local authorities a broad power, the general expression still had to be considered against the background of the case law and the courts’ approach to local authorities’ powers under s.111.

The court stated that s.2 did not give local authorities carte blanche to make arrangements that had a potential advantage to the authority’s financial position nor was it a power to do anything that was not specifically excluded by s.3. Lord Justice Moore-Bick defined the scope of the well-being power as “power to take steps that had as their direct or indirect  object some reasonably well defined outcome which it considered would promote or improve the well-being of its area, i.e. power to do things themselves, or to procure or enable others to do things, that directly affect the well-being of their areas”. In his view, action to reduce the costs of goods or services purchased by the authority, which did not have as its object the use of the money saved for an identified purpose which the authority considered would promote or improve well-being, did not fall within the section. Nor could an action that was expected to reduce an authority's costs be regarded of itself as doing something that would promote or improve the well-being of the area.

The court also discussed the use of the s.111 power and previous case law on what was “incidental” to an authority’s functions. It upheld the High Court’s view that the setting up of a mutual insurance company was not incidental to the functions of a local authority and so was not covered by the s.111 power. Participation in LAML was not the same as obtaining insurance under conventional commercial arrangements, but was only incidental to that incidental function.

Procurement issue

 The court looked at the Teckal exemption to the EU Procurement Directive, and considered whether the LAML agreement was an in-house arrangement so that it fell within the exemption. It confirmed that the Teckal principles do apply to contracts covered by the 2006 Regulations and that the first condition could be satisfied by the joint control of a group of local authorities.

However, while their Lordships did concede that arrangements between participating authorities could in principle come within the exemption, they found that here LAML could not be regarded as a department of each of the participating local authorities - it could not operate effectively unless its Board had considerable freedom to manage its insurance business, and the nature of its business, and the possibly differing interests of different authorities and affiliates, were antithetic to the necessary local authority control.

Implications for local authorities

For local authorities that are endeavouring to meet central Government’s efficiency targets through shared services and innovative ways of working, the Court of Appeal’s decision will be a blow. Instead of pushing through new delivery vehicles, confident that they can rely on the well-being power, authorities that were proposing to use s.2 will now have to scrutinise those proposals to make sure that the decision will produce or fund a defined social, economic or environmental well-being benefit to their area – the rationale that it will simply bring a financial benefit to the authority will not be enough to bring the decision within the authority’s powers.

Authorities will still be able to use other appropriate powers, for example a legitimate use of s.111 or their trading powers, for such arrangements. Therefore authorities should consider carefully at the outset which power is best suited to achieve the desired purpose, and take expert advice.

Authorities will also have to take great care when structuring new vehicles that the new body is sufficiently controlled by the authority if they do not wish it to be caught by the Public Contracts Regulations.

The full judgment is available here.