Cheltenham BC's attempt to sue former managing director "over-emphasised" legal advice: KPMG

Cheltenham Borough Council’s failed attempt to sue its former managing director – which saw it incur more than £1m in external costs alone – was severely hampered by a lack of clarity in its constitution, flaws in its decision-making process and an over-emphasis on legal matters, a public interest report by auditors KMPG has found.

The council had taken Christine Laird to the High Court in January 2009 in pursuit of £962,000 compensation, claiming she had failed to disclose relevant information about her health when she applied for the post in 2002. Laird’s contract was terminated in August 2005, when she was given an ill-health pension.

Defeat in the case left the council nursing an estimated total loss of £2.1m. The KPMG report acknowledged it was not unreasonable for a council to go to court to seek recovery of a substantial financial loss. However, it found that:

• The council incurred significant expenditure and management time in pursuing the claim for damages
• There was a lack of clarity in the council’s constitution over who should make decisions about the case, and in practice the decision-makers (including the Borough Solicitor) changed during the process
• There were flaws in the decision-making process “whereby decisions were made with an over-emphasis on legal matters and not enough on financial, reputational and risk matters”. Some potentially crucial decisions were not addressed and others were made too late
• The council failed to manage the case as a corporate issue and apply wider project and risk management processes, with too much focus being placed on developing a legal case, and
• The council’s “understandable” precautions in managing the committee process had unintended consequences of limiting opportunities for members to be fully informed and involved.

The KPMG report made 26 recommendations. These include conducting a review of its constitution “to make clear what the Borough Solicitor can and cannot do regarding decisions to instigate and continue legal action, whether financial limits should apply to the Borough Solicitor’s delegated authority, and when and from whom further sanction is required for financial expenditure above that limit.”

It also said the council should, in all instances, take decisions based on a balanced range of success factors including service needs, legal issues, financial implications and risk. Throughout the case, the council had received consistent advice that its prospects of winning were 60:40 in its favour and that it had a “strong case”, but KPMG argued that the local authority failed to give sufficient attention to the flip-side of the legal advice - i.e. that it had a 40% chance of losing.

An estimate of the potential risks and costs should be made before starting legal proceedings that might incur significant costs, KPMG added, and this analysis should be revisited through the process, “and certainly whenever there is a sea change in the case”.

The report also suggested that all legal casework should have a formally appointed instructing officer and a written scoping document. The Borough Solicitor or other members of the legal team should only be the instructing officer “in rare circumstances”.

KPMG audit director Ian Pennington said Cheltenham BC was right to consider its options over whether it could recover some of the significant costs it had incurred “but mistakes were made which, if avoided, may have limited the further costs the council incurred”.

He added: “There was no single issue or failing, rather there were a series of issues that taken together over time created the situation. The council did not recognise this as events were unfolding and did not respond effectively or early enough.”

Pennington said the legacy of the dispute continued to absorb time, energy, attention and money. He called on the council to “move on” and encouraged members of all political groups and officers “to put the turmoil behind them”.

The report will be considered at a meeting of Cheltenham BC on 22 March.

In its immediate response, the council noted that even if all the improvements recommended in the KPMG report had been in place at the time, the council may still have decided to pursue the action through the court.

Chief executive Andrew North said: “This is a helpful report. We have supported it each step of the way, as we are aware that it covers an issue of significant interest to the people of Cheltenham. Of course, there are lessons that we have learnt from this case and in recent years, as KPMG have recognised, we have made considerable improvements to the way we do things.”

Cllr Andrew Wall, chair of the council’s audit committee, said the council needed to come up with a set of actions.

He added: “I don’t want the council to be in this position again. The audit committee will be making sure that these actions are implemented. It is essential that the council follows its processes and that these process are the best they can be.”

A copy of the report can be downloaded here.