The political dimension

The legal arguments will run and run, but the real key to resolving the issues highlighted by the LAML case lies with our elected representatives rather than the courts says Graeme Creer.

Many words have been written about the LAML case, Brent LBC v Risk Management Partners Ltd and London Authorities Mutual Limited & Harrow LBC [2009] EWCA Civ 490, but the saga has moved on, and become political.  

To start with, let us clear up a couple of misconceptions. First, no one has ever suggested that participating in LAML was irrational, perverse or even unwise in the slightest. Secondly, leaving the procurement issue aside, Moore Bick LJ made it clear in the Court of Appeal that, had joining LAML been within the scope of Brent’s legal powers, there was nothing wrong with the way they were exercised. Whether you call it “vires”, or “legal powers”, the LAML decision is simply about what local authorities can and cannot do.

For as long as anyone can remember, and probably since the dawn of civilisation, national government has tried to limit what local government can do. The reason is rarely made clear. Is it just political and intellectual arrogance, or raw power-broking, or does it perhaps really matter to the health and wealth of the nation?  

Whatever the reason, there is a tug of war, and sometimes local government is given new powers, but always grudgingly and with strings attached. Central to the LAML case was an analysis of the strings attached to the supposedly string-free well-being powers in section 2 of the Local Government Act 2000.

The predecessor to the well-being powers was section 137 of the Local Government Act 1972. This allowed local authorities to spend a limited sum of money on anything which, in their opinion, would benefit their area, or part of it, or all or some of the inhabitants of their area.  

In 1979, at the request of the Afghan government, the USSR deployed troops in Afghanistan to suppress an insurgency. Such things happen. In consequence, a number of nations decided to boycott the 1980 Moscow Olympics. The Conservative UK government supported the boycott, and refused to send a team, but allowed individual athletes to attend.

Some Labour local authorities wanted to pay their expenses. Did they have power to do so? They said they could rely on section 137, because it would benefit some inhabitants, namely the athletes. But what, said the sceptics, about those authorities that only wanted to support one athlete? Section 137 is expressed in the plural. No problem, said the authorities, their mums and dads live in the borough, and they will also be pleased.  

This kind of thinking led, in 1989, to amendments to section 139, whereby the benefit had to be both “direct” and “commensurate with the expenditure”. At least the government said, if not quite in so many words, that they were making changes because local authorities could not be trusted. They might do things which were not sensible, or, to put it another way, which were different from what the government would have done.  

At the same time, a wearisome procession of vires cases filed through the courts. They pondered many intricate arguments, and, in the end, decided that Parliament could not possibly have intended to allow local authorities to do this strange and dangerous thing, whatever it may have been, and found against the authority. Council lawyers became the people who told you that you could not do things, and there was much woe.

The Labour manifesto in 1997 said that local government should be less constrained by central government, but it did not promise a new general power, nor did the new government’s first local government white paper.  They promised a new duty to promote well-being, alongside the new community strategy. This is the same structure as for best value: a new statutory duty and a statutory plan. But everyone accepts that the best value duty does not confer a new general power (otherwise the LAML case would never have happened), so presumably the well-being duty would not have done so either.  

There was, however, a clamour for a power of general competence, and the duty suddenly became a power, limited only in that it was not to be used to generate income (except by accident), and did not permit you to impose regulatory requirements on others or to do anything that was expressly forbidden by another statute.

The statutory guidance made it clear that this was a “power of first resort”. A string of cases stressed the breadth of the power. These were generally cases where people had asked the local authority to do something for them and, instead of saying “we don’t want to”, the authority had foolishly said “we can’t”, and then found that they could.  

The gaps are being filled. From 2003, income could be raised by charging and trading, and, perhaps, if the 2007 removal of the requirement for bylaw approval is ever brought into force, local authorities will have a reasonably free power to regulate.

This was an earthly paradise of powers, where everything was intra vires. Local government lawyers became enablers, although the absence of pointless litigation reduced many to begging in the street. But the dark shadow of the vires cases was never far away and, with the Court of Appeal’s decision in LAML, there is fear and trepidation in the land again.

The actual decision has been analysed to death, but in short, these are the central propositions.  

First, establishing, capitalising and participating in a local authority mutual is outside section 111 of the Local Government Act 1972, either because it involves the assumption of risk and is “somewhat speculative” (Pill LJ), or because it is “complex” (Pill LJ) and “more elaborate” and so “can less easily be regarded as incidental to the performance of the authority’s functions” (Moore-Bick LJ).

Secondly, those activities are outside section 2 of the 2000 Act – the well-being powers – either because the old cases make it “unlikely that Parliament conferred a carte blanche on local authorities” and “the guarantees and degree of speculation … take the activity beyond what Parliament intended by the well-being clause” (Pill LJ) or because “there must be some degree of connection between the authority’s actions and the promotion or improvement of the area’s well being” but “action to reduce the costs of goods or services … which does not have as its object the use of the money saved for an identified purpose which the authority considers will promote or improve well-being does not … fall within the section” (Moore Bick LJ).

So there is no power to establish an insurance mutual. But what are the wider implications?

Imagine a new back office shared service arrangement, or joint venture. Under what power is it made?  It is likely be outside section 111 if it involves an excessive assumption of risk and can be described as “speculative”, or if it is too elaborate. The problem is that, away from the extremes, there is no certain way of knowing which arrangements meet these tests and which do not.

It does not, on its own, promote well-being. It saves money. It will be outside section 2 if the speculative element is not what Parliament had intended, having regard to the pre-2000 case law, but no one knows what this means. It will also be outside section 2 if there is no clear intention to use the money saved for well-being purposes.  

Where does this take us? Does there have to be a link between the way the money is saved and the way it will be spent, or can they be totally unrelated? What degree of certainty does there have to be about the spending promise? If all that is needed is a sentence in the report saying “we will use the money saved to provide better social services or alternatively reduce the council tax”, then the whole thing is farcical. Is this what the Court of Appeal intended?

In the vast majority of cases the LAML principle will not cause a problem, but if the arrangements are more elaborate, more money is at stake, the risks are higher, there is no obvious related spending, and the administration are unwilling to make binding spending promises this side of budget-making, then it will be very difficult to know if the scheme is legal or not.  

Opinions vary as to the importance of this. Pessimists say that it strikes at the heart of shared services arrangements. Optimists say that the LAML case is, more or less, peculiar to its own facts, because risk pooling arrangements are always going to be complex and risky, and section 2 would have been satisfied if Brent’s report had contained a statement about how the cost savings would be applied.

There may be other ways of achieving the same objective. The delegation of functions, or a joint committee, are clearly intra vires under sections 101 and 102 of the Local Government Act 1972 and sections 19 and 20 of the Local Government Act 2000. The Local Authorities (Goods and Services) Act 1970 allows local authorities to supply administrative, professional or technical services to other local authorities and certain other public bodies.  

If you are going down either of these roads, however, you have to abandon section 2 and set up a structure which genuinely embodies these principles.  We do not think that the power to trade (under section 95 of the Local Government Act 2003) through a company helps, though, because it only allows you to do for a commercial purpose something that you could do already for a non-commercial purpose.

The pessimists think, therefore, that the LAML case has undermined section 2, by requiring the direct promotion and improvement of well-being (as opposed to indirect, through saving money which can be used for well-being purposes –  remember the Moscow Olympics and the amendments to section 137), by reintroducing the old case law which section 2 was meant to consign to history, and by introducing another layer of legal uncertainty.  

So the LAML case has led to another hue and cry for a general power of competence. What was the government’s response? After some shilly-shallying, it has emerged as a late amendment to the Local Democracy, Economic Development and Construction Bill. The new clause, introduced in Parliament on 13 October, gives government the ability to make regulations enabling local authorities to enter into insurance mutuals, and does no more that that.

This is welcome, but it does absolutely nothing to rebuild confidence in the well-being powers. In fact, if it reduces the chance of a review of the LAML judgement by the House of Lords, it may be positively damaging.

Meanwhile the Conservative Party has completed a long, slow U-turn. It now trusts local authorities. The February 2009 “Control Shift” policy paper promises to “enlarge the freedom of local councils to act in the best interest of residents, by giving them a ‘general power of competence’”.

They promoted an amendment to the government’s new clause. This would have replaced section 2 with the following: “Every local authority has full powers and capacity to carry on or undertake any activity or business, do any act, or enter into any transaction with full rights, powers and privileges for so doing … subject to (a) this Act …(b) any other enactment and (c) the general law.”

The opposition amendment fell. The minister’s response in Parliament was this: “We are aware that the decision in the LAML case raised concerns about the scope of local authority powers, and through the “Strengthening local democracy” consultation we have sought to better understand them. We have acted speedily to answer the immediate concerns raised by the case, so as to ensure that best value authorities can take part in insurance mutuals.

“As part of our commitment in the consultation, we are considering whether there are other cases in which existing local authority powers are not sufficient to enable them to improve services and achieve efficiencies. However, they are complex issues that need careful consideration. I assure the House that we are committed to such consideration following the recent consultation, but I am concerned that “power”, as it is expressed in the amendment, would not give councils the certainty that they need if they are to take part in mutual insurance. Indeed, the Court of Appeal judgment, which in a sense is at the root of the government amendments, indicated that any general power would be unlikely to provide local authorities with the necessary confidence to engage in mutual insurance and similar arrangements. We are introducing our amendments today to address that problem, but, as I have said, we are committed to considering other ideas that came forward in the consultation.”

We do not know what the minister thought was wrong with the Conservative clause. The Strengthening Local Democracy” consultation, which closed on 2 October 2009, also said that that “changing the well-being power or introducing another form of general power would not be certain to ensure local authorities could engage in mutual insurance arrangements”.  

Nothing is certain in this life, of course, but this claptrap means one of three things: the CLG legal team have told the minister that it is impossible to draft legislation conferring a general power of competence, neither ministers nor the CLG trust the courts, or the government wants to hit the thing into the long grass. The other possibility is that all three are the case.

And, sadly, the consultation paper reiterated the old refrain: “Tell us what new powers you need and we will think about granting them.” This will get the same answer: “We don’t know what we will want to do in the future because we haven’t thought of it yet”.

This is as sterile as the other exchange, in which central government whinges that insufficient use is being made of section 2, as though it was a special toy that we had been given for Christmas, and local government says that it is using it all the time but that the whole point is that it should not have to worry about such things any more.

Next, the government will announce their response to comments made in consultation. It will not matter much what it is, because the chances of further legislation this side of the election are remote, and, whoever wins, there will be a new minister, and a new white paper, and time will pass. Meanwhile the pessimists (who evidently include the CLG) and the optimists will offer their different opinions, and the well-being powers will limp wounded into an uncertain future.

Graeme Creer is head of local government at Weightmans