06 June 2008
The second ruling in the case involving the mutual insurance company set up by the London boroughs shows that the problems stem not from the project itself but from an inability to meet legal requirements
Last month, we commented on the first ruling in the London Authorities Mutual Ltd case ('Whose wellbeing is it?' May 23–29). The second ruling was given on May 16, and again the judge at first instance found against the local authorities involved in the mutual insurer and in favour of the private sector challenger.
As with the first ruling, the main lesson lies in the authorities' failure to meet the detailed legal requirements needed to deliver the project rather than the nature of the project itself.
It was common ground between the parties that a high-value contract for insurance services had been awarded to Laml, a special purpose company owned by a group of London councils, without that company winning the work in a competitive exercise. The challenger, Risk Management Partners, argued that the contract should have been exposed to competition under the European Union public procurement regime. Brent and the other London authorities argued that the in-house company exemption, based on the Teckal case, meant that no tendering was necessary.
The first part of the judgment relates to whether the Teckal exemption applies in the UK, as that case was decided by the European Court before the introduction of the Public Contracts Regulations 2006 — and the exemption is not mentioned in those regulations. Here the judge found for the local authorities, holding that there had been no intention to exclude the Teckal ruling from UK law when drafting the 2006 regulations. The public procurement regime also governs only the award of contracts.
Lord Justice Stanley Burnton therefore followed the European Court, which had largely determined that the notion of a 'contract' excluded in-house arrangements (which are, of course, non-contractual) and that this concept should apply in very limited circumstances to a wholly owned company. The issue then turned to whether or not those limited circumstances were applicable to Laml. In Teckal, two limitations are mentioned. First, the public body or bodies must have a similar level of control over the company as they do over their in-house units; and, secondly, the in-house company must deliver the essential part of its services back to the public bodies.
The European Court had already clarified the application of Teckal in a series of further cases. Notably, in Stadt-Halle, it ruled that any private sector shareholding was fatal to the exemption applying. Also in Parking Brixen, control was clarified to mean that there had to be a power of decisive influence over both strategic objectives and the significant decisions of the company.
On the facts of the case, the judge considered that the authorities had failed to demonstrate that the manner in which Laml had been structured could meet the first control test, and therefore did not consider the second legal test at all. He considered that the use of a private company to manage Laml was evidence that there was too much private sector influence, and in Stadt-Halle it had been decided that the ethos of the company had to be firmly public sector not private sector. Moreover, the governance arrangements gave considerable independence to the company, rather than the control necessary under the Parking Brixen clarification.
Brent had therefore breached the procurement regime when it abandoned the original tendering exercise, in which Risk Management Partners had participated, and awarded the contracts to Laml without a formal competition. It will be obliged to pay compensation for that breach, unless the decision is overturned by the Court of Appeal.
The ruling again illustrates the point that in public law it is essential to ensure that things are done correctly, not just properly authorised. No one doubts that Brent and other councils were pursuing the government's shared services agenda and that Laml held out the promise of efficiency gains and tangible rewards.
Moreover, its operation could be lawful; but the judge has held in both instances that they did not come within the relevant legal principles. With the benefit of hindsight, it can be seen how the company could be structured to come within both the wellbeing power and the Teckal exemption, although it might be difficult to rectify what has been done.
So no one should doubt that if the modernisation agenda is to be delivered in a meaningful way, there will be losers. If the private sector is excluded from a market it is hardly surprising that it does not take this exclusion lightly and seeks to exploit the regulatory regime.
Ultimately, case law judgments such as this one help authorities by clarifying the regulatory regime and making sure others who follow in the wake of pathfinders do so more safely. It is to be hoped that authorities such as Brent are not discouraged from pressing ahead with the modernisation agenda.
Stephen Cirell is head of local government and Professor John Bennett is a consultant solicitor with Eversheds. They are authors of Best Value: law and practice, published by Sweet and Maxwell
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