Mutual joy - Supreme Court clarifies the procurement rules for local authority companies

The Supreme Court has today overturned the Court of Appeal’s decision in the LAML case on the application of the procurement rules to local authorities’ mutual insurance arrangements.  The decision gives greater certainty to local authorities that are contemplating new entities to share the delivery of services.

Background

The case, Brent LBC and Harrow LBC v Risk Management Partners Ltd [2011] UKSC 7, 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), a rival insurance intermediary which had tendered for the insurance contract, applied to quash the decision and claimed damages, contending that Brent's award of the insurance contract to LAML breached the Public Contracts Regulations 2006.

Procurement claim

Brent contended that it did not have to comply with the 2006 Regulations as the contract was awarded to a company which fell within the so-called “Teckal exemption”: this is the principle laid down by the European Court of Justice (ECJ) in Teckal srl v Comune de Viano (C107/98) that there is no “contract” for the purposes of the EU Procurement Directive where the contracting authority is formally dealing with a legally distinct person but: 

• exercises over that person a control similar to that which it exercises over its own departments (the “control test”), and 
• the person carries out the essential part of its activities with the controlling authority (the “function test”).

The High Court allowed RMP's claim.  The Court of Appeal then dismissed Brent’s appeal, ruling that although arrangements between participating authorities could in principle come within the Teckal exemption, 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.  The nature of its business, and the possibly differing interests of different authorities and affiliates, were antithetic to the necessary local authority control. (For details of the CA decision, see our Alert: The Court of Appeal rules on in-house contract awards and the Teckal exemption.)

Supreme Court

Brent and RMP settled their proceedings; Harrow then continued with the appeal, which was confined to the question whether, by entering into the mutual insurance arrangements with LAML without first putting those contracts out to tender, Harrow had acted in breach of the Public Contracts Regulations 2006.

On 9 February 2011 the Supreme Court allowed Harrow’s appeal and ruled that the 2006 Regulations do not apply where a local authority intends to enter into a contract of insurance such as that with LAML.

The appeal raised six issues:

• Did the Teckal exemption apply to the 2006 Regulations?
• If so, was the exemption applicable where the contract was for insurance?
• If so, to satisfy the Teckal "control test", must the contracting authority exercise a control over the legally distinct entity which is similar to that which it exercises over its own departments, or was it sufficient that control is exercised by the contracting authorities collectively?
• If it was sufficient that the contracting authorities exercise that control collectively, was that requirement satisfied in this case?
• Was the Teckal "function test" also satisfied in this case?
• Was a reference to the ECJ required?

Control test

On the first two points, Lord Hope found that the Teckal exemption did apply and that an insurance contract was just as eligible for exemption as any other contract such as one for waste services.

He then considered case law on the control test, focusing on Coditel Brabant SA v Commune d'Uccle (Case C-324/07).  In that case, the ECJ stated that the test would be satisfied where control was exercised by the authorities collectively – it was not essential that it be exercised by each authority individually.   

Lord Hope disagreed with the Court of Appeal’s view that the nature of LAML's business and the possibly differing interests of different authorities were antithetic to the necessary local authority control. Although it was true that, when it came to claims, the nature of the relationship between each participating member as insured and LAML was essentially one between independent third parties, collective control over strategic objectives and significant decisions was with the participating members at all times and so the Teckal control test was satisfied.

He also found that, on the facts, the function test was also satisfied and that none of the issues or the answers gave rise to any questions requiring guidance from the ECJ.

Conclusion

The Supreme Court’s decision usefully clarifies the law on the Teckal exemption and will be of assistance to local authorities that are exploring setting up a jointly or wholly owned public entity to share services.

Local authority vires issues, whilst litigated in the lower courts, were not the subject of the appeal to the Supreme Court.  The specific concern relating to local authorities’ powers to enter into mutual insurance arrangements has been addressed by s.34 of the Local Democracy, Economic Development and Construction Act 2009 (once in force).

The vires position in relation to other shared services arrangements remains as concluded in the Court of Appeal.  Therefore authorities will have to continue to rely on existing powers, such as the wellbeing power, along with the proposed General Power of Competence in the Localism Bill.