There are some legal lessons that councils can learn from the recent case of London Authorities Mutual Ltd
On June 9, the Court of Appeal found against London Authorities Mutual Ltd and in favour of Risk Management Partners, the private sector challenger to the mutual insurer.
The court found that the London Borough of Brent’s involvement in Laml was outside its powers and therefore unlawful. The judges ruled that the widely drafted wellbeing power did not extend to setting up
the mutual.
This ruling affects all the other local authority members of Laml because they also used the power to authorise their actions.
Laml was an interesting concept of a jointly funded self-insurer. It ticked all the current policy boxes highlighted by the savings programme under the 2007 Comprehensive Spending Review and the 2009 Operational Efficiency Programme.
It offered Gershon savings, Best Value, working together with other authorities, shared services, economies of scale… the list goes on. The difficulty is that meeting government policy does not mean that the law can be ignored.
Local authorities are constrained both by the powers given by Parliament and by the courts in the manner in which they exercise those powers. The Appeal Court decided not only that the councils had no power to establish and operate Laml, but also that the placing of the contracts with the insurer, which in legal terms is a separate entity to its shareholders, breached European Union procurement rules.
One lesson to take from the case is that the ‘wellbeing of their area’ in section 2 of the Local Government Act 2000 means just that. It is not the wellbeing of the council itself, it is the wellbeing of the public it serves – and the links between the two cannot be too tenuous or remote. It was held that the motive of saving money, albeit to plough it back into other services, was not sufficient of itself.
This is particularly true in the case of commercial activity that carries a degree of risk.
‘The guarantees and degree of speculation involved… take the activity proposed beyond what Parliament intended by the wellbeing clause.’ (Lord Justice Pill at page 43 of the transcript).
It now seems that direct rather than indirect benefit to the local citizens needs to be demonstrated. Local government lawyers and policy-makers will be thinking closely about that issue and how it might be demonstrated in future schemes.
Another lesson is that when trying to make savings and efficiency gains, authorities will need to ‘keep it simple’. The place to start is with the more obvious savings highlighted by reports such as the Audit Commission’s Back to front rather than with complex commercial activity. The more complex the scheme and the more law involved, the harder it will be to get it right.
In the case of these complex schemes, it is necessary not only to focus on whether or not something is legally possible, but exactly how to provide that scheme in a manner that embeds the relevant legal powers.
The legal powers should not be a ‘bolt on’ but should underpin and shape the whole scheme. The way the legal regime was approached in this case was unfortunate, in that there were different powers under consideration and a lack of consensus between the local authorities on the best ones to rely on.
Perhaps the third lesson is to ‘common sense-check’ any complex scheme. If it is easy to persuade the average council tax payer that a scheme is the most obvious way to bring wellbeing to their local area, it should be easy to persuade a court if the authority is challenged.
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 and Charging and trading in local government
