Supreme Court upholds Harrow appeal over LAML procurement
Arrangements put in place by a group of London local authorities for mutual insurance satisfied EU and UK procurement rules, the Supreme Court has unanimously ruled.
The London Borough of Harrow, which pursued the appeal, hailed the judgement as a landmark ruling that would allow authorities to save millions of pounds. The council said the Supreme Court decision removed the final hurdle to sharing insurance services, once statutory powers introduced by the previous government are brought into force.
The case of Brent London Borough Council and others (Harrow LBC) v Risk Management Partners [2011] UKSC 7 related to the high-profile creation by various London authorities of the London Authorities Mutual Limited (LAML), which was designed to reduce the cost of their insurance premiums.
The London Borough of Brent was one of the participating authorities, contracting with LAML to provide the council with insurance. But it did not conduct a tendering process for the award of the contract of insurance.
Insurer Risk Management Partners launched a legal action on both vires and procurement grounds. The Court of Appeal found in the claimant’s favour in 2009, in a ruling that dealt a significant blow to local authorities’ confidence in their well-being powers.
The claim between RMP and Brent has now settled, but Harrow – advised by law firm Weightmans - was given permission to continue to appeal so as to have issues of principle decided in relation to the Teckal or in-house exemption.
The exemption, which is a result of case law of the European Court of Justice, means that in certain circumstances, the award of a contract by one public body to another separate legal person will not fall within the definition of a “public contract” under the relevant EU directive. As a result the directive would not apply and there is no requirement for the contract to be put out to tender.
Teckal has two tests – a control test and a function test. The first requires a local authority to have similar control over the person to be awarded the contract as it exercises over its own departments. The second test is that the person must carry out the essential part of its activities with the controlling authority or authorities.
The three issues considered by the Supreme Court were whether:
- the Teckal exemption applies to the Public Contracts Regulations 2006
- the Teckal exemption applies to contracts of insurance
- in order for the Teckal exemption to apply, the control which the contracting authority exercises over the contractor must be exercised by the authority individually or whether it would be sufficient to be exercised collectively, together with other local authorities.
At both the High Court and the Court of Appeal, it was held that Teckal did apply to the 2006 Regulations and contracts of insurance. However, it was also found that the LAML arrangements failed the control test as the mutual was too independent. Proceedings against six local authorities, including Harrow, were stayed in the High Court pending the Supreme Court's ruling.
The Supreme Court has now unanimously allowed Harrow’s appeal, taking the view that the requirements of Teckal were satisfied.
In his judgement, Lord Hope said the exemption applied to the UK regulations. On the issue of differences between the 2006 Regulations and the directive, the judge pointed out that the purpose of the regulations was to give effect to the directive and there was nothing to indicate that the UK regulations intended to depart from the ECJ case law.
The judge also said that the exemption was available for contracts of insurance, adding that it was not important whether the service was one the authority could provide for itself. “What matters is whether the arrangement satisfies the control test,” Lord Hope said. “If it does, an insurance contract is just as eligible for exemption under Teckal as a contract for the collection and disposal of waste.”
Lord Hope and Lord Rodger both reviewed the ECJ case law on the purpose and scope of the exemption.
“The directive is not intended to protect the commercial sector by forcing public authorities to obtain the services which they need on the commercial market,” Lord Rodger said. “The purpose of the directive is simply to ensure that, if public authorities do decide to obtain the services which they need from outside bodies, proper procedures are followed to ensure that potential providers of the services have an opportunity to compete for the work.”
Accordingly, the judge said, the directive does not apply where the authority obtains the services from its own resources, nor – following Teckal – does it apply where the authority obtains services from a separate body which is so closely connected it should be regarded as still obtaining the services in-house.
Lord Rodger said the two tests in Teckal were designed to guard against the risk that an over-generous interpretation of the exemption would undermine the effective operation of the directive.
The judge added that the ECJ had “seen no reason to distinguish in principle” between a situation where the body from which the services are obtained exists to serve a single authority and a situation where it exists to serve the interests of several authorities.
On the control test, Lord Hope said the Carbotermo case showed the ECJ recognised that individual control was not necessary for the exemption to apply. A contracting authority can exercise control over the contractor alone or together with other public authorities. “The point was made despite the fact that the proportion of shares held by the other public authorities was very small.”
The judge added: “No injury will be caused to the policy objective of the directive if public authorities are allowed to participate in the collective procurement of goods and services, so long as no private interests are involved and they are acting solely in the public interest in the carrying out of their public service tasks.”
The LAML arrangements did allow local authorities to exercise collective control over the mutual, Lord Hope said. “I am satisfied that collective control is enough. This means that the test will be satisfied even though it is in the nature of collective control that no single authority can be said to exercise the kind of control which it would have over its own departments.”
Analysing LAML’s set-up, the judge disagreed with Stanley Burnton LJ’s assessment that the provisions gave a picture of a business that had a relatively independent administration, and with the Court of Appeal’s view that the nature of the mutual’s business and the possibly differing interests of different authorities were antithetic to the necessary local authority control.
“It is 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. But, as I have already said, individual control is not required. Collective control over strategic objectives and significant decisions was with the participating members at all times. They controlled a service which was designed exclusively for the performance of their public functions. No private interests whatever were involved. On these facts I would hold that the Teckal control test is satisfied.”
The Supreme Court concluded that the function test was also satisfied.
Cllr Bill Stephenson, Leader of Harrow Council, said: “This landmark decision clears the way for councils to innovate and share services, saving tens of millions of pounds for taxpayers across the country.
“At a time when we need to find huge savings, this case is an important win for all public bodies. It liberates us to cut operational costs in areas such as insurance, so we can direct a greater portion of our money to delivering front line services for our residents.”
Cllr Stephenson added that the Supreme Court had provided “some much needed clarity” in procurement law and removed some of the contradictions between the domestic and European Courts.
“In a time of shrinking budgets, councils are now free to work collaboratively and provide services without embarking on an expensive procurement exercises,” he suggested.
Weightmans partner Michael Green, who advised both Harrow and LAML throughout the case, said the ruling provided certainty on how the Procurement Regulations will be applied.
He added: “The Supreme Court decided that the EU directive on procurement was never intended to protect the private sector and this ruling could now pave the way for public sector bodies to join together and deliver shared services in a wider context.”
Philip Hoult
